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Department of Premier and Cabinet

Principles of taxation

Amendments to the Act in December 2011, clarified that rates are a form of taxation.

Councils, when making rating decisions, must take into account the taxation principles and balance these sometimes competing principles. The primary principles of taxation are as follows:

Capacity to pay

The burden of revenue collected for ‘public goods’ provided by governments should be spread fairly across the community. In other words, those with a higher capacity to pay tax should pay more than those with a lesser capacity to pay.

Property values are considered throughout Australia as a reasonable proxy for assessing a ratepayer’s capacity to pay.

Benefit

Councils must balance capacity to pay with the benefit principle, acknowledging that there are some services that benefit the community as a whole, so everyone should contribute. The Act allows up to 50 per cent of general rates to be fixed for all ratepayers (Section 91). Fixed charges differ from service charges as they will apply equally to all ratepayers to recognise that they are likely to benefit equally from the provision of the service.

The benefit principle also accommodates judgements by councils that some groups have more access to, make more use of and benefit more from specific council services. This principle is also applied in the specific service rates and charges, such as garbage.

Simplicity

This principle relates to how easily the tax is understood by taxpayers, the certainty of application and its ease of collection.

Local government rates meet elements of this simplicity principle as rates are:

  • unavoidable in their application;
  • levied on a regular and consistent basis; and
  • collected at specific intervals.

However, many ratepayers do not understand the basis of their rates. This is partially due to rates notices not containing sufficient information, and partially as assessed annual value (AAV) is not easily understood.

Rates policies should help ratepayers to understand the basis of rates and the judgements that are being made by a council in setting rates.

Sustainability

This section taken from the State Tax Review Discussion Paper prepared by the Department of Treasury & Finance

A sustainable tax system will grow in line with the needs of changing expenditure, taking into account changes in economic growth and demographic changes. A sustainable tax system:

  • will raise sufficient funds to meet current and future government spending needs;
  • provides revenue stability; and
  • supports a balanced budget in the long run to avoid placing the burden of current expenditure on future generations.

The rates system is generally thought to be a sustainable system of taxation. Councils determine the amount that is needed to be raised to undertake its service delivery needs. Issues arise where a council’s financial management does not take into account all budgetary considerations or has no long-term component to planning.

The rates policy should reflect how revenue collection is aligned with medium to long term planning by a council.

Economic Efficiency

Efficiency of a tax relates to the effect of the tax on the behaviour of the taxpayers. Local government rates are considered to be generally efficient because rates have a limited effect on a decision to buy a house. The liability to pay rates is incurred annually, it does not change dramatically from year to year, it is built into property values and the amount paid is a relatively low proportion of income.

The efficiency of rates as a tax can be distorted by a sudden abnormal rise or fall in property values, which affects valuations. Some consideration may need to be given to how a council intends to manage significant and unreasonable fluctuations in rates.

< Legislative framework

 Key parts of a rates and charges policy >

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