A toxic mix of black-hole State and Council budgets, new legislation, aggressive valuation policy, & Land Tax ‘sleeper’ provisions, is producing a property tax explosion … and it’s only the tip of the iceberg.

Both State and Local governments have business and industry firmly in their sights as a source of revenue to fill empty coffers.

Land tax revenue alone has risen a staggering 60% in the last two years whilst the number of Payers has risen 45%. That equates to a whopping 68% increase on a per head of population basis.

Councils have been hit by falling contributions from both State and Federal governments, so are looking at “soft” targets with limited voting numbers at the ballot box to prop up cash strapped budgets. The weapon is Differential Rating, alias discriminatory taxation.

Land Tax Sleeper – when “averaging” has a nasty sting

Land Tax is levied on the aggregate unimproved land value held as at 30 June each year. These valuations are set by DERM (Department of Environment and Resource Management) – formerly DNR (Dept of Natural Resources).

Land Tax is usually calculated on the average of the previous three years DERM valuations multiplied by 1.0 to 1.7 cents per dollar (depending on threshold level) up to $5.0M + 2.0 cents per dollar over that amount (the new “surcharge” from 30/06/2009). For many, that alone will equate to a 25% rise in Land Tax this financial year.

“Averaging” of values was intended to reduce sudden rises in land tax caused by higher valuations. This works when values are rising, but it has an insidious effect when values fall, as is now happening in most commercial and industrial markets. It is further exacerbated when DERM annual valuation programs are postponed or cancelled, as was the case in February 2009 when Premier Bligh (for the first time in living memory) invalidated months of work by DERM just two weeks before announcing an election (but let’s not be cynical). So, a lot of property remains stranded on outdated, inflated values.

After reaching record levels in 2007, most industrial land prices in QLD have now fallen 20%-40% with commercial land following suit, though it’s harder to determine the extent of the commercial land fall, given so few transactions. Commercial development sites are about as popular as doggy-doo on the footpath.

Property owners are now facing rocketing land tax charges when the property markets and business profitability are heading backwards.

Mind you, there still are some ‘capping’ mechanisms – thank goodness for the 50% increase cap. Imagine getting a Land Tax bill in these economic times only 50% higher than last year – wow, what a relief.

Councils’ Differential Rating – discriminatory local taxation

Ironically, differential rating was first introduced about 30 years ago so that western councils could provide rating relief to rural farmers suffering drought and economic bad times. They were land rich but cash poor. So Councils were given the power to set a lower “differential” rate in the dollar. For the 60 odd years prior to that, all Queensland councils could only charge one universal rate in the dollar. Mmmmm … that seemed fair.

About 15 years ago, Brisbane City Council were the first to see the opportunity of reversing the intent of the legislation. Other councils throughout the State quickly took up the idea i.e. charge a higher rate on business and industry thereby maintaining (for a while at least) the unsustainable promise of keeping residential rates at or below CPI. It was a popular winner at the ballot box notwithstanding that Councils’ operating costs and budgets were escalating well beyond CPI. Apparently that promise is no longer sustainable because of, … yep; you guessed it … “the global economic crisis”. Residential rate increases between 5%-10% seem relatively common these days. Meanwhile Commercial and Industrial rate increases of 20%-40% are not uncommon.

The differential rating juggernaut is getting hungrier – there is a gaping revenue hole in every Council budget, so non-residential property is in the firing line … again.

Here is an example of the blatant targeting of a small group in a regional Council budget : “Land zoned Special Purposes upon which is located storage or handling facilities for commodities or containers shipped through the Port of …” and they got slammed with a general rate 304 times higher (that’s not a misprint) than the standard residential rate.

It is common around the State to see the general rates (cents/$) set 2- 4 times higher than the standard residential rate. The just released Brisbane 2009-10 budget sets the differential for most commercial /industrial at 2.4 times higher. Shopping centres get a bigger whack at up to 3 times higher. With land valuations running into multi-millions, the effect is exponential.
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