By Julian Bajkowski and Paul Hemsley

The government of New South Wales could soon be in the bizarre position of attempting to sue itself after the head of a parliamentary committee holding an inquiry into the state’s Land Valuation System suggested that Broken Hill City Council consider litigation against the state’s Valuer General.

The unprecedented broadside against the state bureaucracy by Liberal MP and Joint Committee on the Office of the Valuer General chairman, Matt Kean, follows a decision in the NSW Land and Environment Court (LEC) that the government overestimated the value of land near Broken Hill owned by mining company Perilya, causing it to overpay rates owed to Broken Hill City Council.

The decision, which is being appealed, potentially exposes the council to the liability of having to repay around $6.8 million, an obligation that would impact its operations and services.

The saga is being closely monitored by councils across the state and the country because of the potential for litigants to challenge government land valuations that are used to help calculate council rates and land tax.

The potential for a slew of legal challenges represents a financial can of worms for the O’Farrell government and comes as some well-resourced property owners continue to successfully challenge overvaluations in the courts, triggering downward adjustments of their land tax and rates obligations.

It was reported in early January that Perilya has lodged a second objection to its land valuations and is subsequently seeking another $6 million.

On the 21st January the NSW Government revealed that it would hold a new inquiry into the state’s Land Valuation System, a move that prompted immediate speculation that millions of property owners could have overpaid rates and land tax.

The terms of reference for the probe say it will “investigate the extent to which the current land valuation system delivers transparent, efficient, equitable and consistent outcomes for stakeholders” including “monitoring and reviewing the exercise of the Valuer General’s functions with respect to land valuations under the Valuation of Land Act 1916 and the Land Tax Management Act 1956.”

The wide brief means that more than 2 million valuations could be put under the inquiry’s spotlight, a huge volume of data for the committee to wade through in its effort to find out whether the system is working satisfactorily. The committee has released an issues paper and called for submissions to be lodged by 8th March 2013.

Specifically, inquiry will examine price volatility in valuations, market distortions and systemic complexity the terms of reference say that the “focus of the inquiry is not directed at revenue but the valuation system.”

Even with the exclusion, there is likely to be little revenue upside for the state government; it will be essentially impossible to retrospectively extract funds from the owners of undervalued properties – while those owning overvalued property have a strong incentive to pursue compensation.

The Shires Association of NSW is backing the inquiry as a way to fix long-standing valuation issues and increase transparency, with President Ray Donald questioning whether valuation problems were as extensive as portrayed in some media reports.

“I wouldn’t say that you could definitely say that that’s happening state wide,” Mr Donald told Government News. “Obviously in the interest of rate payers, transparency and accountability in an immediate inquiry is a good way – independently – to establish just what’s happening.”

Mr Donald said part of the issue was that the NSW rates system dated back to 1916.

“Anything that’s been around for so long and now is found to have situations arising that are questionable as to the accuracy of the system, the best thing is to hold an independent inquiry as soon as possible and make sure it doesn’t last forever so that a better system can be put in place as needed.”

Mr Donald said if it was proven that councils were overcharging on rates based on valuations that were too high “then obviously that has to be rectified.”

Mr Donald said that in “small rural shires” like his, general rate revenue was around 25 per cent to 30 per cent of council income and just covered staff costs, a situation that necessitated councils finding other sources of revenue.

“We need more direct payments to us from the federal government,” Mr Donald said.

“A more direct, consistent and reliable share of tax revenue paid direct to us because the functions we carry out benefit our communities and we are underfunded.”