Posted on April 28, 2023 by Sue Puckeridge, Alex Rutherford and Emma Wei 17

Court confirms the limitations on the recovery of overpaid council rates

The Supreme Court of NSW (Supreme Court) has considered whether a landowner, who was successful in an appeal against the failure of the council to recategorise its land as farmland, was subsequently entitled to a refund of the amount of the overpaid rates.

Background

In the 2016/17 and 2017/18 rating years, Muswellbrook Shire Council (Council) recategorised two large parcels of land (Land) owned by Mangoola Coal Operations (Plaintiff) from ‘farmland’ to ‘mining’ for rating purposes. This change in categorisation increased the rates payable in respect of the Land.

The Plaintiff commenced proceedings in the Land and Environment Court (LEC), appealing against the categorisation of the Land as ‘mining’. The LEC dismissed the appeal, finding that the Land was correctly categorised as ‘mining’ (read our previous blog about that decision here).

However, in 2021 the Court of Appeal overturned the decision of the LEC, finding that the evidence did not support a conclusion that mining was the dominant use of the Land, and remitted the matter to the LEC for further determination, where subsequent consent orders were made upholding the Plaintiff’s appeal (read our previous blog about that decision here).

Two Separate Appeals

The Plaintiff subsequently commenced two separate proceedings against Council, both seeking to recover the amount of the overpaid rates, which were approximately $3 million, excluding interest (Overpaid Rates):

1. Proceedings in the LEC (LEC Proceedings), alleging that the Council’s failure to refund the Overpaid Rates was a breach of Chapter 15 of the Local Government Act 1993 (LG Act), namely that it was required to refund the Overpaid Rates pursuant to section 527 of the LG Act.
2. Common law proceedings in the Supreme Court (Common Law Proceedings), claiming an entitlement to be paid in the amount of the Overpaid Rates, the rates having being paid under a mistake of law.

The two matters were dealt with together in the Supreme Court.

The Plaintiff submitted that the amount of the rate overpayment was approximately $3 million plus interest (Overpaid Rates)

Two of the key issues considered in the proceedings were:

1. Whether the Recovery of Imposts Act 1963 (Imposts Act) applied to the proceedings; and
2. Whether s 527 of the LG Act provides for refunds of rates paid following a change in category of land.

Application of the Imposts Act

The Imposts Act operates to restrict the time within which actions may be may be brought against the government and certain other persons, such as a local council, for the recovery of certain taxes, fees, charges and other imposts.

Section 2 of the Imposts Act provides as follows:

(1) No proceedings shall be brought to recover from…the Government…or person or out of any fund to whom or which it was paid, the amount or any part of the amount paid by way of tax or purported tax and recoverable on restitutionary grounds (including but not limited to mistake of law or fact):

(a) …
(b) in the case of a payment made subsequent to the commencement of this Act, after the expiration of twelve months after the date of payment.

(2) Subsection (1) does not apply to any proceedings brought pursuant to any specific provisions of any Act:

(a) providing for the mode of challenging the validity or for the recovery of the whole or any part of any tax actually paid, and
(b) specifying a different period within which such proceedings must be brought.

…

Council rates are taxes for the purposes of the Impost Act.

Where, because of the Impost Act, money paid by way of tax or purported tax ceases to be recoverable, the right to recover the money is extinguished: s 5 of the Imposts Act.

In respect of the claim in the LEC Proceedings, the Plaintiff argued that s2(1) of the Imposts Act did not apply for a number of reasons, including that:

• the claim in the Class 4 Proceedings was a statutory claim and, and therefore was not on ‘restitutionary grounds’; and
• even if the Court finds that the claim was on ‘restitutionary grounds’, s 2(1) of the Imposts Act did not apply by way of s 2(2), as the LG Act provides a period other than 12 months within which proceedings challenging the validity of an impost must be made.

The Supreme Court rejected the arguments, and found as to the first argument that “it would not be consistent with the legislative scheme to treat the phrase “on restitutionary grounds” as excluding claims made under statute”.

As to the Plaintiff’s submission that s 2(1) did not apply, it found that while the LG Act provides a period within which proceedings challenging the validity of an impost must be made, it does not provide a time limit within which proceedings for recovery of the payment must be made.

In respect of the Common Law Proceedings, it appears that the Plaintiff did not dispute that those proceedings were on restitutionary grounds. However, for the same reasons as in the Class 4 Proceedings, the Supreme Court found that s 2(1) of the Imposts Act applied to the proceedings, and was not disapplied by way of s 2(2).

Therefore, the 12-month limitation period provided at s 2(1)(b) of the Imposts Act applied to the recovery of the Overpaid Rates.

Section 527 of the LG Act

If there is a change in the category of land, s 527 of the LG Act requires the Council to ‘make an appropriate adjustment of rates paid or payable by a rateable person’.

The Plaintiff submitted that an ‘adjustment of rates’ includes a refund.

The Council submitted that s 527 doesn’t contain the words “refund” or “repayment,” in contrast to other sections of the LG Act which explicitly provides for refunds of rates in certain circumstances (see for example ss 578(2) and 593 of the LG Act).  The phrase ‘adjustment of rates’ was in contradistinction to a refund or recovery.

Having regard to the Court of Appeal in Bayside Council v Karimbla Properties (No 3) Pty Ltd [2018] NSWCA 257 at [135]-[152], the Court found that an adjustment of rates under s 527 does not include refunds.

Conclusions

In accordance with the conclusion that s 527 of the LG Act does not provide for refunds of rates, the Class 4 Proceedings were dismissed with costs.

In respect of the Common Law Proceedings, his Honour found s 2(1) of the Imposts Act applied, as it was not disapplied by s 2(2). Therefore, except for the last payment of rates which was within the 12 month limitation period, the Plaintiff had no right of recovery of amounts paid based on the categorisation of the land as ‘mining’.

Consistent with this finding, the Council conceded that part of the most recent rate payment, in the order of $68,000, was refundable. Judgment was made for the plaintiff against the Council for that amount, together with interest.

Implications for Councils and Landowners

This decision confirms that s 527 of the LG Act does not provide for refunds of rates where there has been a change in categorisation of land.

In fact, the right to recovery of any council rates paid over 12 months in the past will be extinguished, in accordance with s 5 of the Imposts Act.

Councils should exercise caution when expending rates received within the past 12 months in cases where the landowner is disputing the categorisation of their land, such as by way of an application under s 525 of the LG Act or an appeal under s 526. His Honour noted in this case that at all times the Council knew that the Plaintiff disagreed with the categorisation, and that it was likely to seek to review it in the LEC, and therefore was entitled to assume that reversal was a ‘real possibility’, and that if it occurred, the Council would have a legal obligation to refund the Overpaid Rates.

You can read the full judgment here.

If you have any questions about this blog post, please leave a comment below or contact Sue Puckeridge on 02 8235 9702 or Alex Rutherford on 02 8235 9720.