How rates are calculated
As part of preparing an annual budget, a council considers community needs in relation to its available income requirements for the coming year before deciding how much it should raise in general rates. A council will also consider the extent of the rate burden on tax payers and may decide to forgo some activities and services in order to avoid high rate rises.
Developing a rating strategy requires a council to strike a balance between competing principles to come up with a mixture of rates and charges that provides the income needed for its annual budget while meeting the tests of equity, efficiency and simplicity.
In broad terms, the total amount of money to be raised in general rates is divided by the total value of all rateable properties. The resulting figure is called the “rate in the dollar”.
The "Rate in the Dollar"
The council determines the amount to be paid in rates by applying a rate in the dollar to the assessed value of each property. When that total value of all properties goes up, the council reduces the rate in the dollar to compensate. There is no windfall gain.
How a “Rate in the Dollar” is Calculated
For a council using only a general rate, the rate in the dollar is calculated as follows:
If council plans to raise the total rate revenue of $10 million, and the total Capital Improved Value of all rateable properties in the municipality is $2,380 billion, then the rate in the dollar is calculated by dividing $10 million by $2,38 billion = 0.42 cents in the dollar.
How are a Property’s Rates Calculated?
The formula for calculating the rates for an individual property (excluding any additional charges or arrears) is the valuation multiplied by the rate in the dollar set by the council. Councils determine the rate in the dollar as part of their budget process.
For example if the Capital Improved Value of a property is $250,000 and the council rate in the dollar is set at 0.42 cents, the rate bill would be $1050 ($250,000 x 0.0042).
Your rate notice will provide specific details on how your rates are calculated.
Property values affect the amount paid in municipal rates. State legislation requires that all properties in every municipality are revalued every two years.
Changes in property values will vary across a municipality. These will be reflected in each property's rate bill. A general revaluation may result in the rates for some properties going up while others go down. If a property's value increases by less than the average increase across the municipality, the rates for that property will be relatively lower. Rates will be relatively higher if a property's value increases by more than the average increase in valuation.
Councils do not collect extra revenue as a result of the revaluation process. Valuations are simply used as an apportioning tool to assess the rates payable for each individual property.
Information about a property's value is included on the rate notice issued by the council.
Property values are determined by independent professional valuers appointed by a council or the State Valuer General. These valuers assess the market value of each property in line with guidelines laid down by the State Valuer General.
Valuers must assess the value of a property in three ways:
- Capital Improved Value - the total market value of the land plus buildings and other improvements;
- Net Annual Value - the current value of a property's net annual rent (by law, Net Annual Value must be at least five per cent of the Capital Improved Value for commercial property and exactly five percent of Capital Improved Value for residential property).
- Site Value - the market value of the land only
Most Victorian councils use the Capital Improved Value to levy rates.
Councils are able to levy either a uniform rate or one or more differential rates. A uniform rate is where all rateable properties in a municipality are charged based on the same rate in the dollar. Differential rates are where councils set different rates in the dollar for different categories of rateable land.
The Council may for example, have differential rates for farm land, various categories of residential property or commercial/industrial properties – each paying a higher or lower rate in the dollar.
Where a differential rate is applied, this is usually to achieve greater equity or efficiency.
There is no limit on the number or type of differential rates that can be levied, but the highest differential rate can be no more than four times the lowest differential rate.
If a council decides to apply differential rates as part of the mix, it will usually consider three equity principles.
- the benefit or user pays principle – some groups have more access to, make more use of and benefit more from specific council services
- the capacity to pay principle – some ratepayers have more ability to pay rates than do others with similarly valued properties
- the incentive or encouragement principle – some ratepayers may be doing more towards achieving council goals than others in areas such as environmental or heritage protection
Another consideration is delivering a simple and transparent system of rates and charges. A simple rating system is more transparent, meaning that the underlying purpose and principles behind it are clearer – who is liable for a particular rate and how the liability is calculated.
Service rates and charges
The Local Government Act enables a councils to impose a service rate or an annual service charge (or a combination of these) for certain purposes. Of the purposes supplied in the Act, most councils today are only involved in collecting and disposing of refuse. While the ability to impose a service rate (based on the property valuation) still exists, a service charge is the more common way of recovering the costs associated with garbage collection, recycling and disposal.
A unit charge may be levied on each property that receives or can access the service, and commonly appears as a separate amount on the rate assessment notice. A different amount may be charged for different property categories or for different sized bins. See Waste Management.
The Local Government Act enables councils to levy a municipal charge. The municipal charge is a flat charge that can be used to offset some of the administrative costs of the council. The total amount raised from the municipal charge cannot be more than 20% of the total raised from the combination of municipal charge and general rates.
Applying a fixed municipal charge may be a way of ensuring that all properties make a standard contribution towards a council’s administrative costs. Some council’s will nominate the costs the charge pays for.