BANKSTOWNCity of Progress

18 July 2008

BANKSTOWN CITY COUNCILPO'Box 8, Bankstown NSW 1885 PH 02 9707 9400 FAX 0297079495

~===:====~=-~Wayne Carter

General Manager

Dr. Michael Keating ACChairmanReview of State TaxationIndependent Pricing And Regulatory TribunalP.O. Box 0290OVB Post Office NSW 1230

Dear Dr. Keating

Review of State Taxation: Other Industries - Draft Report

Thank you for providing Council the opportunity to comment on the Tribunal's DraftReport, Review of State Taxation - Report to the Treasurer dated June 2008.

Council notes the range of recommendations put forward by IPART but proposes tocomment on just two of these recommendations which have significant potential toadversely impact on Bankstown City Council, the community services we provide, and onthe residents and many small businesses in Bankstown.

Our primary concerns relate to IPART's draft recommendations to:

1. Transfer insurance industry funding and levy collection for the State Fire BrigadeServices to local councils

2. Remove the current payroll tax exemption for local councils.

Council is strongly opposed to both these recommendations on a range of importantgrounds and principles which are outlined in the comprehensive submission attached.

Notably, these two proposals put forward by IPART will have significant adverse impacton rates imposed on residents and businesses in Bankstown, many of whom are facingsevere mortgage and socio economic stress.

The combined impact of the two recommendations would require an 18% increase inBankstown Council rates over and above the annual rate pegging increase, which issimply not sustainable. The two recommendations will cost more than $12.6 million perannum to begin with. The Fire Brigade levy has the potential to grow exponentially onceinsurance industry accountability and pressure is disconnected from revenue raising,which could have an even more adverse impact of local residents in the future.

IPART's proposals will impose an increase in rates in the order of $300 per annum ormore on the average home owner in Bankstown, many of whom are pensioners, people

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with large families or working families suffering from high interest rates, and majorincreases in their grocery, petrol and travelling costs to the workplace. Council isparticularly opposed to imposing such levy increases on its residents which have no directbenefit to the local community. Indeed, Bankstown City Council has deliberately avoidedseeking rate increases beyond the State Government rate-peg for many years. IPART hashowever now recommended very significant increase well beyond historic rate pegginglimits.

It is essential that IPART reconsider and examine more fully the philosophical principlesand the socio-economic impacts of these recommendations.

Council strongly urges the Tribunal to remove these two recommendations from its finalreport to the Treasurer.

Should you require further information or wish to discuss, Mr. Greg Brown, Council'sGroup Manager Strategy and Governance, may be contacted on 02-9707 9526 orgreg.brown@bankstown.nsw.gov.au

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Attached: Bankstown City Council Submission

Cc

Mr Garry PayneDirector GeneralDepartment of Local Government

BANKSTOWNCity of Progress

Submission on

Independent Pricing And Regulatory Tribunal

Review of State Taxation

Report to the Teasurer

Other Industries - Draft Report

June 2008

Bankstown City Council66 -72 Rickard Road BANKSTOWN NSW 2200P.O. Box 8 BANKSTOWN NSW 1885

Principal Contact:Greg BrownGroup ManagerStrategy and GovernancePhone: 02- 9707 9526 Fax: 02-9707 9895Mobile: 0411 188 409greg.brown@bankstown.nsw.gov.au

Alternate Contact:Geoff BarndenManager Strategy & PolicyPhone: 02-97079615 Fax: 02-97079070Mobile: 0407 607 580geoff.barnden@bankstown.nsw.gov.au

July 2008

(Blank)

Bankstown City Council Submission on IPART Review of State Taxation DraftReport

Bankstown City Council's primary concerns relate to two recommendations in IPART'sdraft report. These are:

Recommendation 7:

Transferring of insurance industry's Fire Brigade Services funding contribution onto localcouncils; and

Recommendation 2:

Removal of the the current payroll tax exemption for local councils.

General Financial and Social Impacts

The financial and social consequences of the two recommendations (2 and 7) do notappear to have been considered fully. Simply suggesting that rate pegging could berelaxed to phase in this cost shifting is not sustainable.

The two IPART recommendations are based on a flawed principle and an assumption thatalthough on the one hand for the last 30 years the State Government through its ratepegging policy has been severely limiting the ability of councils to raise adequate revenueto maintain local services and infrastructure and has repeatedly expressed reluctance toabolish it, it would be prepared to substantially lift the rate cap to gain funds for itself.

The combined and consequential impact of the two recommendations from IPART wouldrequire substantially high increases in council rates. For many councils, an increase inrates in the range of 20-45% would be required. The LGSA's estimate of average rateincrease across all councils is approximately 26%. This would simply make it impossiblefor councils to raise additional rate revenue to fund increased need for services andbacklog infrastructure maintenance and renewal, which has been identified by theIndependent Inquiry into Financial Sustainability of NSW Councils (the Alien Inquiry) asalmost $6 billion.

Given the arbitrary nature and history of rate pegging control by successive stategovernments, which have often failed to keep pace with the increase in LocalGovernment's service delivery costs and inflation, it is highly unlikely that an adequateincrease in the rate pegging limit will be allowed. This is evidenced by the most recent ratepegging increase announced by the Minister, which set out a figure lower than the officialrate of inflation. The continued erosion of Local Government's capacity to deliver existingservices is likely to reach new heights.

Even if a corresponding rate pegging increase were allowed, this would still be seen bythe community as council pushing up rates, not a transfer of taxation by the StateGovernment, which it actually is. Because of the enormity of increase, the concerns fromthe community will be significant, and low income, pensioners, renters and otherdisadvantaged groups will be most hard hit.

Financial and Socio-economic Impact on Bankstown

Together, the two recommendations have the potential to require Bankstown Council toraise an extra $12.6 million through its rates, which equates to an 18% increase in itsrates over and above the annual rate pegging increase. The potential hardship for lowincome families, single income households, and pensioners will be significant.

According to the latest SEIFA (Scio-economic Index for Areas) index (ABS) of relativesocio-economic disadvantage, Bankstown ranks as the fourth most disadvantaged localgovernment area (LGA) in metropolitan Sydney. The City has significantly higher share ofunemployed, low income, and pensioner population, compared with the Sydney StatisticalDivision. Since the 2001 Census, there has been an increased concentration of people inthe lowest income quartile in Bankstown.

In addition to the impacts arising from increased fuel and grocery prices, there iscontinuing evidence that an increasing number of ratepayers in Bankstown are facingfinancial hardship as a result of consecutive four increases in interest rates during lasttwelve months. Currently, Bankstown has the second highest level (0.95 %) of mortgagedefault within Sydney metropolitan area, which has prompted some section in the mediato term it as the so called 'repossession capital' of Sydney.

For many years, Council has been allowing its pensioners an additional $40 in raterebates per assessment, above the State Government's rebate of $250, which hasremained unchanged since 1989. Because of their hardship, more than 700 ratepayers inBankstown have indefinitely deferred their rates payment and accrued rates and chargesagainst their property. Council recently sought approval from the Department of LocalGovernment to establish a rating and charges 'hardship category' to extend someassistance to ratepayers in distress.

In these circumstances, Council is concerned that an 18% increase in rates over andabove the annual rate pegging increase of around 3% will cause significant hardship formany Bankstown residents, who are already suffering financial distress.

Considering the financial pressure from rising fuel prices and interest rates, earlier thisyear the NSW Government announced that rate pegging limit for 2008/09 financial yearwould be reduced from 3.4% for 2007/08 to 3.2%. Therefore, an increase of 18% inCouncil rates seems even more counterproductive and unlikely to be realisticallyembraced by the government.

Fire Services Funding -IPART Recommendation 7:

In the short term, the statutory contributions by insurance companies to fund fire servicesshould be replaced by a corresponding increase in the contributions by local councils, witha phased implementation and accommodating increases in the municipal rate cap.

IPART's recommendation would mean that NSW councils would be required to meet 86%of the fire services funding from their ordinary rates revenue. Currently, councils contribute12.3% of the total NSW Fire Services funding.

The recommendation suggests that the insurance companies' contribution of 73.7% oftotal funding be transferred onto Local Government and collected through council rates.

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Council Response

Bankstown Council strongly opposes the proposal that local councils should beresponsible for almost full funding for fire services. Council has serious concerns aboutthe proposed method of funding the fire services. These are:

1. Councils will be required to collect a State tax, masked in Council rates, on behalf ofthe state government and for a service in which councils have no role or control overthe budget or services provided.

2. The IPART's recommendation is based on a flawed assumption that the fireservices costs can be equitably apportioned through council rating, which is basedon unimproved land values.

3. The solution proposed essentially socialises a private sector problem - namely, theraising of levies through the multi national insurance industry, and transfers anindustry funding issue by imposing new regulation on individual home owners.

4. Concern that, in the event this proposal proceeded, Council will not be allowed acorresponding increase in rates through an adequate increase in the annual ratepegging limit, particularly in the light of the ongoing practice of cost shifting(documented in the recent report by the Local Government Association on CostShifting from State to Local Government) and the arbitrary nature of rating controlthrough the rate pegging regime.

State Taxes for State services should be transparently collected by the StateGovernment

Council considers it inequitable and inappropriate that the component of the fire servicefunding currently collected by the private sector (insurance companies) now be transferredto Local Government and thus to individual residential and business rate payers.

The Fire Brigade levy is a State tax and it should primarily be a State Governmentresponsibility to collect it. It should not be raised through masking it in Local Governmentrates revenue. It is unreasonable to expect the Local Government to function as the taxcollection agency for another level of government. Council does not agree with thepremise that it should be the revenue collector for the State Government only becauselevying through land rates is considered to be a relatively simple process. It is also nottransparent government.

The appropriateness of transferring to Local Government the responsibility of raisingalmost the full cost of a service, which is a State Government responsibility, isquestionable, there is no fundamental rationale for doing so, and it is a clear case of taxand cost shifting.

Desirably, the Fire Service as a State Government emergency service should be fullyfunded by the State Government, as are the NSW Police and Ambulance Services.

Councils and local ratepayers do not have any role or input in the strategic or serviceplanning, decision-making or budgeting process of the NSW Fire Services, just as theyhave no role regarding the resourcing of Police or Ambulance Services. Councils shouldnot be required to fund the Fire Services from its rates revenue.

According to the correspondence principle, each level of government should use its ownrevenue raising capacity to finance its own expenditure functions. This ensures that thelevel of government that provides the function is accountable to those that fund as well asthose who are expected to benefit from them. Funding and performance functions should

be transparent so that it is clear to the taxpayer what he/she is being taxed for and who isaccountable.

Bankstown City Council and its ratepayers are already providing massive subsidies toState Emergency Services through infrastructure provision and annual servicing of the ofthe SES in the region. Council is spending $2.5 million on an SES regional infrastructureHQ and has annual SES expenditure exceeding $100,000 per annum. These subsidiesborne by local ratepayers have not been understood or recognised in the IPART report.

One of the universal principles for taxation is that of transparency. If Local Governmentwere to absorb a huge fire services funding levy in its ordinary rates imposed onratepayers, then the tax is not transparent.

Administrative Costs

The IPART report has not considered the significant additional administrative burden andpotential financial risk for Local Government in collecting, processing, and remitting thistaxation burden, including non-payment and bad debt. It is inequitable to impose thesecosts on Councils, incurred to raise a state tax for a state responsibility.

If the administrative costs of collecting this state tax are not recompensed throughadequate rate-capping increase then councils will be forced to reduce existing services tothe community.

Inequitable Charging and Inequitable Outcomes

The IPART recommendation is also unsound and untenable because of its failure to takeinto consideration fllat the imposition of the Fire Brigade levy on all ratepayers would leadto significant inequities relating to the distribution of these costs. The primary responsibilityof the Fire Brigade is protection of assets, such as buildings from fire damage. It is fairthat the basis for apportioning these costs should be made with regard to the value of theassets being protected.

Council rates are calculated based on unimproved land values provided by the ValuerGeneral's Department. The VG's land values do not factor in the specific value or type ofbuilding on a specific property nor has it any relationship to the extent of fire risk orservices provided. Therefore, using council rates as the vehicle for distributing these costsis not appropriate and will result in considerable inequity. The existing approach usinginsurance values is a more appropriate basis.

The recommendation will transfer the funding burden to rateable properties only and thereis no guarantee that this will have any correlation to any possible reduction in insurancepremiums. As rates are based on land values of rateable properties, there will be nocorrelation between the volume and extent of fire services provided and the tax burdenimposed. Fire services are provided to all NSW residents, not just ratepayers.

A simple example illustrates the problem. Two similar size properties, adjacent or in closeproximity, would most probably have similar land values, as provided by the ValuerGeneral's Department. One property may have an old, small, and dilapidated fibro cottageof little value. On the adjacent property there is a recently constructed magnificentmansion or a multi-unit building, which would cost several times more to replace than thesmall dilapidated cottage. If both properties have equal or near equal land values theywould each contribute equally to the cost of the provision of fire services.

As per the IPART recommendation, the fire service levy would apply to all rateable land. Avacant block of land similar in size and land value to the two properties referred to above,and requiring no or minimal fire services protection, will also be charged the same fee.

Using land values to distribute fire services funding costs also has the risk of skewing ittowards areas with relatively higher land values with no regard for services provided orrisks associated.

Also, a considerable percentage of incidents that the fire services are required to respondto are motor vehicle related accidents and rescues and not related to protection ofproperties. Residential and business ratepayers would also bear such costs.

Inappropriate use of Land Valuations as a Basis for Levies

The Fire Brigades use land valuations provided by the Valuer General to determine thecontribution level of a council. The land valuations determined by the Valuer General arereviewed every three years. Usually, at the time of revaluation there is a considerableincrease in the total level of valuation. Rate pegging has the effect of managing andminimising this impact for ratepayers - but there are no such limitations when the fireservice levy is determined.

As councils are valued at different times they currently are faced with a spike in their fireservices levy. Because of this, each council can face a wide variation in the way the levywill increase from year to year.

Proposal that costs of Non Rateable properties - 'insurance free riders" be borne byratepayers

IPART's recommendation originated from the Insurance Council of Australia (ICA)'sNovember 2007 submission to IPART. The ICA submission argues that only 75% ofproperties in NSW are insured and hence the remaining 25% properties do not contributeto the fire services funding. Their suggestion was to shift the insurance industrycomponent to the Local Government rate base to capture all properties.

Drawing on from the lAC recommendation, the IPART report assumes that transferringthe fire services cost to a land value based rating regime will take care of 'underinsurance", 'non-insurance' and 'free rider' problems and equity.

IPART has not addressed how such 'free rider' problems and equity issues will be takencare of when non-rate payers include non-rateable State and Crown lands, schools andschool properties, public hospitals, and church/religious organisation properties. Thesenon-ratepayers already have free or highly subsidised access to infrastructure, library,sporting fields and other services provided by councils. The IPART recommendation willprovide free fire services to them, at the expense of ratepayers. IPART has made nosuggestions as to how Local Government and its ratepayers should address these freerider problems.

Essentially it appears the IPART proposal is proposing to socialise a private businesssector problem (a problem of the multinational insurance industry) through increasedtaxation via increased rates on residential and business owners at a local level. This is aflawed approach and not a good public policy.

In conclusion, the current local government fire services funding mechanism is flawedbecause the Local Government contribution is based on unimproved land values, and theIPART recommendation to collect all fire services levies through the rating process wouldfurther entrench an inequitable funding system.

Financial Impact on Bankstown City Council Rates

The annual contributions of Councils to fire services, over which Councils have no role orcontrol, are already high. Each year the charges increase far beyond the rate cap

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increase. Council's Fire Service Levy payment for 2007/08 was $1,683,196. In 2008/09,the amount budgeted for this is $1,850,000. This increase represents approximately 2percent of total rate revenue which could otherwise be used to provide services to thecommunity or address major unfunded infrastructure backlogs.

If the IPART scenario was to have been applied in 2007/08 - that is Council covers theinsurance industry's contribution to fire service's funding, (73.7% of the total funding), thiswould raise the Council contribution from 12.3% to 86%. Council's fire service contributionin 2007/08 would have been raised from $1.68 million to $11.77 million. This meansCouncil would have been required to raise an extra $10.08 million for fire servicefunding. This would require an increase in annual rates in Bankstown in the orderof 14%, besides raising the current Council contribution towards fire services. This is overand above any increase in rates attributable to rate pegging increase from the Ministerand routine annual increases in fire services levy.

An increase in the rates levied on all ratepayers within Bankstown Local Government areaby 14%, as suggested by IPART, without an increase in services or service levels isindefensible.

Council Recommendation:

1. The existing statutory contributions by insurance companies to fund fire servicesshould either continue and be expanded to cover 100% of costs, or alternatively theState Government should fund the Fire brigade Services from consolidated revenuewith a revenue share from the insurance industry

2. The inappropriate collection of fire brigade levies through Councils should cease, andCouncils should redirect this funding to infrastructure and community services.

3. If councils are made responsible for collecting the funds:

(a) The Fire Services levy should be shown as distinctly separate state governmenttax on council rates notices

(b) Councils should receive adequate recompense for the administrative cost, debtcollection, bad debt and a service charge as percentage of the revenue collected.

(c) Councils should have input and some degree of control into the budget andplanning process and level of the local and regional fire service to be provided.

(d) There should be a guaranteed and regulated corresponding reduction ininsurance premiums.

Proposed Removal of Payroll Tax Exemption for Local Government: IPARTRecommendation 2:

Over a two year period, the payroll tax exemption for local councils should be removedand a corresponding increase in municipal rate-pegging limits should be phased in. (Thedraft IPART report acknowledges that the removal of the payroll tax exemption forcouncils would be contentious).

Council Comment:

Bankstown Council strongly opposes this recommendation. This is appears to be arevenue raising exercise and the arguments supporting the removal of the exemption areat best tenuous. In making this recommendation, IPART undermines the reciprocal tax

exemption arrangement, which helps to avoid hidden taxes and prevent complexreciprocal taxation arrangements.

The recommendation to remove only one of eight classes of existing exemptions isinequitable.

It has been a historic arrangement and long established principle that the generalgovernment activities of any tier of government are exempt from the taxes of other levelsof government. Government is currently exempt from State Government taxes, includingpayroll tax, for its general government services. Core state government activities/lands areexempt from council rates. The removal of payroll tax exemption for Local Governmentautomatically removes the justification for council rate exemptions for state governmentproperties, Crown land. It also gives rise to a question what services Local Governmentshould provide where land is not rateable.

If IPART is in favour of reciprocal taxation, which requires each level of government to besubject to the taxes from other levels of government, it should also take into considerationthe potential for complex and costly legal and administrative arrangements among thelevels of government.

Although IPART has proposed that the rate pegging limit be raised to allow adequateincreases in rates, it may become administratively difficult and complex to determine thecorresponding increase in rate pegging limits for each council individually. A universalincrease in the rate pegging limit for all councils will not be adequate, because thepotential payroll tax impact will be different for each council.

According to the IPART report, the recommendation to reduce the threshold from$600,000 to $500,000 will mean that about 5,000 small businesses across NSW will besubjected to at least an additional $28,750 tax p.a. In an economic downturn, where fourinterest rate rises in the past twelve months, increase in fuel and food prices havestressed families and small businesses, this would be an unreasonable impost.

Financial Impact on Bankstown Costs and Rates

Bankstown Council's gross actual payroll amount for 2007/08 was $43,552,799. Its totalestimated gross payroll amount for 2008/09 is $46,482,337.00 Le. an increase of$2,929,538 over the 2007/08 level.

A theoretical exercise conducted to ascertain what increase in rates would be required in2008/09 to fund the cost of payroll tax at 5.75%, as proposed in the IPARTrecommendation, found that to raise the payroll tax amount of $2,672,734 an increase of4% over and above the applicable rate pegging limit would be required. This is in additionto raising the $2.9 million increase in payroll over the 2007/08 levels, which again equatesto another 4% increase in rating.

Ratepayers would get no new or improved services as a result of this increase in rates.The community would not see these as state government tax but rather an increase inrates by their council.

Council Recommendation

1. That the IPART abandon its recommendation regarding removal of payroll taxexemption for Local Government. If IPART is not prepared to do this, then Councilurges IPART to review the entire principles concerning reciprocal taxation to bereviewed.

2. IPART should make a corresponding recommendation that all rate exemptions fromCommonwealth and State Government agencies, lands, and corporations. It is

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important that IPART approaches reform in these areas comprehensively, rather thanwhat appears to be a "cherry picking" or "Iow hanging fruit" approach which willultimately affect the more vulnerable groups in society.