For decades, many New Zealand councils have based their rating systems on land value, where rates are calculated solely on the value of the land itself, excluding any improvements. While this approach has its merits, it often fails to capture the full picture of a property’s worth and its impact on council services. Capital-improved value (CIV), which includes both land and improvements like buildings and infrastructure, offers a more comprehensive and equitable alternative. As communities grow and evolve, the conversation around transitioning to CIV has gained momentum, with compelling reasons to consider its adoption.
Communities with a high concentration of underdeveloped or vacant land tend to benefit from land value-based systems, as rates are calculated without considering improvements. This can favour large rural properties or speculative landholders who are holding land for future development but not actively utilising it. Conversely, urban areas, where property improvements make up a significant portion of total value, are often disadvantaged by land value-based rates. Here, homeowners and businesses carrying out development or enhancing their properties bear a disproportionate share of the rates burden relative to their wealth or use of services.
Shifting to CIV helps rebalance this inequity. Communities with diverse property values—ranging from modest homes to commercial developments—tend to benefit from the shift, as contributions are more closely aligned with overall property value and capacity to pay. However, rural or farming communities, where land value often represents a greater share of property worth, may experience an increase in rates, particularly if improvements like large homes or outbuildings significantly raise their property’s overall valuation. These dynamics underscore the importance of tailored communication and robust modelling to ensure all stakeholders understand the implications and benefits of the change.
The conversation about transitioning to CIV is about more than just numbers—it’s about fairness, growth, and sustainability. A CIV-based system ensures that ratepayer contributions better reflect the benefits they receive and the impact they have on council resources. For example, a property with extensive improvements, such as a large residential development or a commercial building, typically generates more waste, uses more infrastructure, and requires greater service provision than a vacant lot of the same land value. CIV helps align rates with these demands, ensuring councils have the resources to provide equitable services across their communities.
The Pros of Capital-Improved Value
- Fairer Distribution of Rates: CIV captures the full economic value of a property, aligning rates more closely with wealth and service usage, making it fairer for ratepayers.
- Encourages Efficient Land Use: By tying rates to total property value, CIV incentivises property owners to utilise land more effectively, supporting urban growth and reducing underutilisation.
- Simpler Communication: Ratepayers often relate to CIV more intuitively than land value, as it reflects their property’s market worth and the value of improvements.
Key Considerations for Transitioning
Transitioning to CIV requires councils to assess potential impacts thoroughly. Modelling is critical to understanding how rates will shift across residential, rural, and commercial properties. This analysis should include:
- Impact on Revenue Stability: Ensure the new system supports predictable revenue streams for long-term planning.
- Effect on Ratepayer Equity: Examine shifts in the rates burden, identifying communities or property types that may see significant changes.
- Legislative Compliance: Align with New Zealand’s Local Government Act to meet equity, transparency, and sustainability standards.
Engaging the Community
Community engagement is crucial for a successful transition to CIV. Councils should communicate clearly and transparently about why the change is being considered, what it entails, and how it will impact ratepayers. Hosting public workshops, providing detailed modelling scenarios, and addressing concerns openly are all essential to building trust and understanding. Using relatable examples, such as specific property types and their rates under both systems, can help make the discussion tangible and accessible.
Conclusion
The shift from land value to capital-improved value represents an opportunity for New Zealand councils to create fairer, more sustainable rating systems. While the transition requires careful planning, robust analysis, and meaningful community engagement, the benefits of a CIV-based system—fairer rates, efficient land use, and alignment with future growth—make it a compelling choice.
If your council is considering a transition to capital-improved value, contact Ibis Information Systems today. With our expertise in rates modelling and strategic planning, we can help you navigate the complexities and deliver an equitable system for your community.
