ACT tax reform: landmark inquiry report finds that reform doesn’t translate to fairness

-accompli, the report reflects the findings from a thorough investigation into what can, and does, really happen in the real world. In this regard, the ACT Assembly’s Standing Committee on Public Accounts, final report on its important inquiry into the issue of commercial rates bucks the trend on so-called tax reform. This is pleasing on behalf of our members and industry, given that a 2012-2013 ACT tax reform has simply resulted in the annual rates paid by our members: (1) growing astronomically, (2) increasingly out-of-synch with land valuation and (3) increasingly volatile. The Committee’s report is an authoritative piece, given the Committee has a mandate to focus on Government revenue and expenditure issues, along with other issues such as Auditor-General reports and market and regulatory reform. The Committee also comprises members from the Liberal Government and Labor Opposition. Through its inquiry process, which included seven public hearings, the inquiry also engaged with some important stakeholders, including the ACT Chief Minister and Treasurer Andrew Barr MLA, and Australia’s Small Business and Family Enterprise Ombudsman, Kate Carnell AO (who is a former ACT Chief Minister). We engaged in the inquiry on behalf of our members, including via a formal submission to the inquiry, appearing at a public hearing (with our valuation and rating adviser Marcus Conabere from Urbis) and responding to Questions on Notice. The inquiry was called in November last year, and included detailed Terms of Reference, which afforded the Committee an expansive scope for its investigations. Pleasingly, this focus was on real-world, material issues and considerations. Based around two core principles of ‘all issues relating to commercial rates’ and the impact the commercial rating system ‘is having on businesses and the property sector in Canberra’, the Terms included: (1) ‘the process for determining rating factors’, (2) ‘how valuations are conducted’, (3) ‘the amount paid by property owners’ and (4) ‘the impact on leasing costs, property values and business viability’. Noting some breathtaking increases in commercial rates for our members since 2012-2013, in our view the key drivers for the current problems are threefold. Firstly, there’s the issue of so-called tax reforms that were introduced in 2012-2013, which centred on a transition away from stamp duty to land-based taxes. Secondly, there’s the lack of a Government rating policy. Thirdly, there’s the widening gap between the growth of commercial rates versus the growth of statutory valuation (which rates are applied to). One key outcome of the ACT’s tax reform has been the shift of a disproportionate tax burden to shopping centres – amongst other commercial properties. The Committee noted that this shift has occurred, noting that there ‘are fundamental problems in the commercial rates regime’, and that the current system imposes a burden on commercial ratepayers, which “appears to have a chilling effect on commercial activity and investment in the Territory”. Notwithstanding the Committee’s 25 detailed recommendations, the Committee’s formal conclusion makes for great reading. Firstly, the Committee notes that its recommendations ‘reflect the high level of concern in the community about the fairness, equity and transparency of the current rating system. There are a higher than expected number of anomalies generated by the present system, and ratepayers in particular categories and circumstances are experiencing undue hardship’. It goes further: ‘The system does not appear responsive to their situation’, and that ‘a further concern is the burden currently being placed on commercial ratepayers which, in spite of government statements to the contrary, appears to be having a chilling effective on commercial activity and investment in the Territory’… this should give the ACT Government pause for thought’. The Committee also concluded that certain issues that have arisen could have been anticipated before the 2012-2013 tax reform was initiated. It’s worth noting that aside from recommendations to bring about prospective change, two of the Committee’s recommendations provide that the Government should consider retrospective determinations of commercial rates and compensating ratepayers who experienced sudden large increases in rates in certain cases. This is pretty substantial stuff. Another driver of the problem our industry has faced is the ACT’s tax reform of transitioning from stamp-duty to land-based taxes, which is a reform supported by tax theorists, reformists and indeed by certain business groups. As tax theory goes, as land is immobile, a tax on land is more efficient (unlike labour and capital), creates less market distortions and encourages an owner to pursue the highest and best use of the land. Even when some groups have talked about the need for ‘transition periods’ on such reform, in the 6-year experiment of this issue in the ACT, the situation has become worse. We’re on the record as calling into doubt the rationale about the abolition of stamp duty and the introduction of broad land-based taxes. This includes the reform proponents’ desires for a ‘broad-base/low flat tax rate’ design, which is ultimately overtaken by the reality of a ‘narrow-base/progressive and differential rate’ design. The latter has largely been the case in the ACT. As we know, major shopping centre investors hold assets over a long period of time. Operating costs such as land-based taxes, including commercial rates, are material issues for our industry and retailers. And in any case, while we aren’t transacting assets frequently, it’s questionable whether stamp duty distorts the market, particularly for investment-grade assets. The desk-top tax theorists and would-be reformists will probably still argue that the ACT’s tax reform is right, but point out that the design was wrong (or some other form of weasel words), rather than accept reality and that their arguments come across as simplistic and naïve. Another driver of the problem our industry has faced has been the lack of a published ACT rating policy or rating factors. This is something that we brought to the Committee’s attention. When we appeared at a public hearing, the following exchange took place principally between the Committee Chair, Vicki Dunne MLA and our valuation and rating adviser Marcus Conabere from Urbis (N.B. based on formal Hansard transcript): Mr Conabere: And rural, sorry. We sought to determine how that is actually done. Typically, there will be government policy or it will be referenced in the enabling legislation as to how that process actually occurs. From our review, we could not find where that was specified in either an ACT policy or the legislation. We made an inquiry with treasury, and we were referenced to a response to a question on notice, which was dated 26 October 2018. That had a series of questions, one of which said, “How is the actual rating factor determined?” The Chair: So that is the only source of their— Mr Conabere: That is the only source that we could find. Mr Nardi: Sorry, Chair: we made an inquiry of treasury; that was the source that they referred us to. The Chair: So it was not a sort of fact sheet or a Q&A on their website? Mr Nardi: No Mr Conabere: Correct. The Chair: Or anything on the back of an envelope that was on a file somewhere? Mr Conabere: Correct. The Chair: Wow. Okay. This evidence helped inform the Committee’s first few recommendations, which centre on the need for the ACT Government to publish in each year’s Budget papers, and on the website of the ACT Revenue Office, the rationale for all rating factors and the rates burden on each category of rateable property. A third key driver of the problems we have faced, as a consequence of the above issues, is the de-linking of statutory land valuation and commercial rates. As part of our evidence to the Committee, we provided modelling which highlighted that for our members’ centres, across the 2012-13 to 2018-19 period land valuation (average unimproved value) decreased by 5.4%, yet commercial rates have increased by 86.6%. This is an adverse gap of 91.9 percentage points. In addition to the de-linking of rates from statutory land values (incidentally, the growth of rates also vastly outstrips the growth of moving annual turnover), the top marginal tax rate for commercial property increased exponentially, with an average 31% compound annual growth rate. We have also seen increased rate volatility (i.e. year-on-year changes), which makes it difficult to undertake annual budgeting including for retailers within shopping centres, noting that (like in other jurisdictions), under tenancy legislation, our members are required to provide annual estimates for recoverable outgoings to their retailers. As a final point to this issue, it is also clear that there is both a gap, and a growing gap, between residential and commercial rates (commercial rates being higher). The Committee has made 25 recommendations in its 124-page final report. The recommendations are, pleasingly, to the point and aim to address both structural and other issues, covering issues such as the need for published rating factors, better rating categories and better apportionment between rating categories. The Committee also makes recommendations to amend the Rates Act 2004. Perhaps reflecting the problematic nature of the current framework, some Committee members recommended that the ACT Government returns the rating system back to how it was in 2012. As I noted earlier, this is in addition to recommendations that the Government should consider retrospective determinations and compensation in certain circumstances. More broadly, the report serves as useful evidence and lessons learned for any other jurisdiction that wants to consider similar so-called tax reform in the future. The ‘lessons learned’ nature of the report, along with the pointed recommendations, are basically a report card for any such jurisdiction to consider, and it should be clearly marked an ‘F’. In our potential engagement with any such jurisdiction, we’d certainly be drawing on the Committee’s report and the ACT experience. The process is now over to the ACT Government to consider and prepare its response to the report. As the Committee concluded: ‘… it is now a matter of urgency that the task begin, and for the ACT Government to engage relevant stakeholders as to support a constructive process, and an effective and equitable outcome’. We are seeking to engage with the Government to try and ensure that the Committee’s work doesn’t go to waste, that the Government understands its tax-reform has been a bad experiment for our industry, and that our members and industry deserve a better and fairer system.