Councils in Queensland are worried that their ability to use differential rating is directly under threat after a Supreme Court judgement found Mackay Regional Council’s decision to impose higher charges on investment properties was legally “invalid”.

Local governments across the state now fear the decision will undermine their revenue base unless they get legislative protection to charge different levels of rates for properties based on the nature of their ownership.

Although other states use differential rating, the revenue measure is particularly unpopular in the sunshine states where property investors have started litigating against councils in a bid to avoid higher charges.

Queensland’s Supreme Court handed down its judgement on 30th April, 2014 in the case of Paton & Ors v Mackay Regional Council case, a precedent that sent shockwaves through councils trying to forward plan their budgets.

The questionable legal validity of the revenue mechanism has the potential to open big funding holes for councils in the event they cannot collect on the charges.

Now Queensland’s peak local government body has called on the state government to introduce legislative and regulatory reforms to “put councils on a sound footing as they prepare their budgets for the coming year”.

Local governments want legislative protection from legal challenges on differential rating because of the risk that a precedent that could force councils across the state to repay a whopping $2.4 billion to ratepayers who believe they have been unlawfully gouged.

The Local Government Association of Queensland (LGAQ) is vehemently defending the use of differential rating, saying many councils use the revenue powers to categorise residential land based on whether it’s used as a principal place of residence or for investment purposes.

LGAQ President Margaret de Wit said while the Supreme Court’s judgement is being appealed, other councils need to make sure their communities can enjoy certainty in regard to future revenue options.

Brisbane Lord Mayor Graham Quirk said he supported the LGAQ’s call for Queensland Minister for Local Government David Crisafulli to introduce legislation to protect ratepayers from the possibility of being liable for retrospective rate refunds to investors.

“I urge the Minister to amend legislation to ensure that Brisbane owner occupier ratepayers are not at risk of being slugged for retrospective payments,” Mr Quirk said.

He said “as a matter of policy”, Brisbane City Council believes that the ability to categorise residential properties for rating purposes according to whether they are owner occupied or not is a “fair, equitable and reasonable” rating arrangement.