Article

Eligibility ‘ Rating Categorisation: the Karimbla Case

NSW local authorities can expect renewed pressure from residential developers seeking to recover rates levied under a business rating categorisation of their residential projects during the construction phase. This article considers the decision in the Karimbla Case, that was handed down on 26 June 2017.

This is a feature article available to the public. For access to all articles from TaxEd, please click here to become a member.

The Sheahan J (NSW Land and Environment Court) has handed down the decision in Karimbla Properties v Council of the City of Sydney et al [2017] NSWLEC 75 (‘the Karimbla Case’).

Karimbla Properties (‘Karimbla’) contended that once earthworks commence on land which has approval for a residential project, the land should be classified as ‘residential’ for rating purposes.

Two of the respondent Councils contended that such land should be classified as ‘commercial land development’ until at least the residential construction was complete (i.e. an occupation certificate issued).

The third respondent Council contended that such land should only be classified ‘residential’ when a substantial portion of the residential units were actually occupied.

The dispute centred on interpretation of s 516 of the NSW Local Government Act (‘LGA’).

Essence of the Decision

Basically, the Court followed the decision in Meriton Apartments Pty Ltd v Parramatta City Council [2003] NSWLEC 309 (Parramatta), as urged by Karimbla, over the opposition of all the respondent Councils.

Categorisation of land as ‘residential’ (under the first limb of s 516) depended on the physical use of the land and that use was sufficiently manifested by commencement of construction of buildings that would be used for the purpose of residential accommodation. Where land is vacant (i.e. not any construction activity), the second limb of s 516 required consideration of its zoning and it was sufficient that the zoning includes the ability to develop land for residential purposes.

The fiscal implications of the case for Councils are exacerbated by Sheahan J’s decision that:

  • As decided in Parramatta, the Court was not constrained in determining its categorisation decision could take effect from the time the ratepayer had applied to the Council for review of the categorisation of the land as ‘residential’. However, as per the Parramatta decision, the Court should normally exercise its discretion to determine the time from which the new categorisation took effect by holding it took effect from the time that the ratepayer applied to the Council for the re-categorisation.
  • Certain NSW legislative impediments to seeking a refund of tax rates where 12 months had elapsed since payment had been made did not preclude recovery of overpayment of rates due to land being re-categorised from ‘business’ to ‘residential’.
  • The Court should not decline to order a refund of overpaid rates in the exercise of its discretion on the basis that the Karimbla had not notified the relevant Council of the change in categorisation within 30 days of the change occurring in accordance with s 524 LGA.

Whether to categorise land for rating purposes as ‘residential’ from commencement of earthworks

(i) Legislative Context

Section 516 of the LGA provides:

‘Land is to be categorised as residential if it is a parcel of rateable land valued as one assessment and:

(a) its dominant use is for residential accommodation (otherwise than as a hotel, motel, guest-house, backpacker hostel or nursing home or any other form of residential accommodation (not being a boarding house or a lodging house) prescribed by the regulations), or

(b) in the case of vacant land, it is zoned or otherwise designated for use under an environmental planning instrument (with or without development consent) for residential purposes, or

(c) it is rural residential land.’ (underlining added)

Before rating land, Councils are obliged to declare the category of the land for rating purposes. The categorisation takes effect from the date specified in the declaration. Where a ratepayer’s land changes in category, the ratepayer must notify the Council of the change within 30 days – s 524 LGA.

Ratepayers can apply to Council at any time for review of the rating classification – s 525 LGA. The Council can declare a particular classification shall apply and is deemed to declare the existing classification applies where the Council fails to make a decision within 40 days of application for re-classification.

A ratepayer can appeal (s 526 LGA) to the Court in relation to either/both of:

  • the Council’s actual/deemed classification decision, and
  • the date on which the declaration is specified to take effect

Any appeal from the Council must be instituted by the ratepayer within 30 days after the declaration is made.

Section 527 LGA requires the Council to ‘make an appropriate adjustment of rates paid or payable’ by a ratepayer following re-categorisation of the ratepayer’s land.

The Court noted (at para 60 and citing s 574(2) LGA) that ratepayers can appeal to the Court within 30 days of service of a rates notice on the ground that the rateable land has been wrongly categorised. However, query whether s 574(2) in fact prohibits appeals under s 574(1) on the ground of categorisation.

(ii) Whether land is ‘residential’

The case considered each of the limbs in s 516(a) and (b).

Sheahan J held that the Parramatta case was directly relevant and that he was obliged to interpret the limbs in accordance with that decision. He went further, and endorsed the case as being ‘correctly decided, and should and would be decided in the same way now’. He adopted its construction of s 516 and also adopted:

 ‘its finding that activities implementing a development consent, which will lead to a residential development of a type not excluded by the section, dictate that the land in such circumstances be categorised for rating purposes as for “residential accommodation”.’

In Parramatta, the Court rejected the Parramatta City Council’s contention that the dominant use of land (s 516(a)) was determined by the ratepayer’s purpose (of building development), which would have required the land to be categorised as used for business activity rather than residential activity. The Court was considering re-categorisation sought by Meriton and said:

‘ … use of the land must  be for a purpose and that the erection of a building is the means in this case by which the land is made to serve that purpose … While intention to use vacant land is not sufficient, as was conceded by Meriton, the purpose of the use of the land is manifested by the commencement of building construction the use of which building is for the purpose of residential accommodation.

… I consider that physical purpose for which land is used … [in the extended sense discussed in Council of the City of Newcastle v Royal Newcastle Hospital and Council of the City of Parramatta v Brickworks Limited]… must be determinative for rating purposes rather than another purpose of the owner/occupier in using the land, in this case undertaking the business activity of property development’.

In Parramatta, the Court was referring to ‘physical use’ in the extended sense discussed in Council of the City of Newcastle v Royal Newcastle Hospital [1957] HCA 15 and Council of the City of Parramatta v Brickworks Limited [1972] HCA 21. Those cases recognised that is possible for land to be used for (i.e. ‘devoted to’) a physical purpose without any physical activity occurring on the land.

The key point made in the Parramatta  decision is that a ratepayer’s  intention that in the future the  land will be used for residential purposes is not sufficient, the land must being physically used for that purpose at the time of re-categorisation to ‘residential’ is sought. Commencement of development works (e.g. excavation of the land as part of the process of constructing foundations) in relation to a residential building will constitute a sufficient physical use of the land for residential purposes.

In relation to s 516(b), the Court in Parramatta considered that the zoning requirement. It held that it was sufficient that the zoning of the relevant land allowed ‘development of any kind, including residential, subject to obtaining development consent’. The point being made is that the ability to develop the land for non-residential purposes, in addition to the ability to develop the land for residential purposes, does not preclude the land meeting the s 516(b) test of being zoned for residential purposes.

In relation to the term ‘vacant land’ to which s 516(b) refers, Sheahan J adopted the Macquarie Dictionary definition applied in Ulan Coal Mines Pty Ltd v Mid-Western Regional Council [2013] NSWLEC 1167:

‘Vacant

  1. having no contents; empty; void.
  2. devoid or destitute (of).
  3. having no occupant: vacant chairs.
  4. untenanted, as a house, etc.
  5. not in use, as a room.
  6. free from work, business, etc., as time.
  7. characterised by or proceeding from absence of occupation: a vacant life.
  8. unoccupied with thought or reflection, as the mind.
  9. characterised by, showing, or proceeding from lack of thought or intelligence.
  10. not occupied by an incumbent, official, or the like, as a benefice, office, etc.
  11. Law
    (a)idle or unutilised; open to any claimant, as land.
    (b)without an incumbent; abandoned: a vacant estate (one having no heir or claimant).’

Refund of rates overpaid due re-categorisation of land as ‘residential’

It is appreciated that local authorities will be especially interested in whether their annual budgets can be disrupted retrospectively, and possibly after elapse of several years,  by re-categorisation decisions being made by the Court.

(i) When re-categorisation takes effect for rating purposes

In the Parramatta case, the Court said:

‘The fact that an application [for re-categorisation] can be made at any time and that there is a 30 day limit for an appeal to be lodged under s 526(2) should not be interpreted as limiting the period of a declaration made by the Court to the date of the application for review made to the Council. Nothing in the legislation suggests such a limitation should be applied. How the Court’s discretion is exercised in making any declaration sought will depend on the circumstances of each case. If the circumstances warrant a change in the rating category I consider it would generally be appropriate to make such a change from the time sought in the absence of “disentitling” conduct by the applicant.’

In the Karimbla Case, Sheahan J accepted that this was correct. In short, in the absence of ‘disentitling circumstances’, a Court should exercise its discretion to declare that re-categorisation took effect from the time application for change in categorization had been sought.

He had to consider a potential disentitling circumstance, as identified under the next heading.

(ii) Court’s Discretion to order refund

Section 524 LGA provides that:

‘ A rateable person (or the person’s agent) must notify the council within 30 days after the person’s rateable land changes from one category to another.’

Karimbla conceded that its failure to comply with s 524 might entitle the Court to exercise its discretion to determine the re-categorisation should not apply from the time of application for re-categorisation.

The Councils contended that:

‘… a council on a 12-month financial cycle would self-evidently be prejudiced by having to find the resources in the current year to refund possibly a substantial sum accumulated over a number of previous years, particularly when they argue the difficulty in the so-called “catch-up” provisions (ss 511 and 511A). Councils’ orderly financial management arrangements will be disrupted.’

Sheahan J held:

‘I do not find the applicants’ failure to notify to be “disentitling conduct” in this case. It has proven to be a costly oversight in some of the cases; it is often not adequately explained; and it possibly dates from 2009, but I do not accept that it ought disqualify the applicants from a refund.

I need also note, in the context of discretion, the respondents’ concession that the appeals were commenced “in time”.’

It would appear that failure to notify a Council of the circumstance that development of land has commenced within 30 days of that commencement (and where a later request for re-categorisation to ‘residential’ is made) will not affect the Court’s discretion to apply the re-categorisation from the time of the actual request for re-categorisation. The appeal to the Court from the Council’s decision to refuse re-categorisation is a different issue and the appeal must be commenced (s 526 LGA) within 30 days after the Council makes the declaration (or semble the deemed declaration under s 525 LGA where the Council has not made an actual declaration within 40 days of the re-categorisation application).

(iii) Recovery of Imposts Act – not relevant

Sheahan J noted that the Recovery of Imposts Act 1963 (NSW) had not been considered in Parramatta. However, he held that this Act did not prevent the Karimbla recovering the overpayment of rates which resulted from the re-catorisation from ‘busines’ to ‘residential’.

He observed that Karimbla was making a claim based on statutory rights (ss. 526-527 LGA), rather than basing its claim on restitution principles, to which the Act was directed. Section 2(1) of the Act prevents a taxpayer from commencing proceedings to recover (on restitutionary grounds) tax where a period of 12 months has expired after payment.

He added that if the Act had applied, the exception in s 2(2) in respect of proceedings ‘brought pursuant to any specific provisions of any Act’ would also have enabled Karimbla to recover the overpaid rates.

(iv) Court’s Power to order refund

One of the Councils contended that the Court lacked jurisdiction to order a refund of rates. Sheahan J held that he had the power to order refund of the overpaid rates. The power arose as ancillary to the express jurisdiction conferred on the Court.

Conclusion

It will be interesting to see whether the respondent Councils will further appeal the interpretation of s. 516 LGA that has now accumulated a line of authority beginning with the Parramatta case where, as Sheahan J notes, the principles of that case have been endorsed in Peabody Pastoral Holdings Pty Ltd v Mid-Western Regional Council  [2013] NSWLEC 86 and SH Camden Valley Pty Ltd v Camden Council [2015] NSWLEC 104.As noted above, the Karimbla Case also deals with additional issues relating to recovery of overpaid rates that had not been considered in earlier decisions.

Disclaimer: Information provided in this article, while correct at time of publishing, is subject to change.