Differential rating is a complicated system that is distinct to each local government area, but the issue is putting some regional Victorian communities under financial pressure.

As councils attempt to balance their budgets and provide services while staying under the State Government's rate cap, the issue of who should pay how much, continues to burden their decision-makers.

In Horsham, councillors are facing pushback from local farmers opposed to rate increases in its 2018 budget, while in Ararat, efforts to change the differential rating system in 2017 partially contributed to the resignation of the former Mayor Glenda McLean.

Yet councils must source their revenue from somewhere, and if rates drop for one group, they usually rise for another.

How do differential rates work?

How councils determine rates: The rate-in-the-dollar If a council plans to raise the total rate revenue of $10 million, and the total Capital Improved Value of all rateable properties in the municipality is $2,380 billion, then the rate in the dollar is calculated by dividing $10 million by $2,380 billion = 0.0042 cents in the dollar. When the total value of all properties goes up, the council reduces the rate in the dollar to compensate.

Differential rates are where councils set different rates in the dollar for different categories of rateable land. Councils are able to levy either a uniform rate across all properties, or one or more differential rates.

Rates are based on property values.

Because farms are usually larger in size, they tend to be worth more than residential properties, meaning farmers pay more in total rates.

So despite the State Government's rates increase cap of 2.25 per cent, farmers could end up paying more because their properties are worth more and their land values are increasing.

To mitigate this, many regional councils charge farmers a differential rate — for example in Ararat, farmers pay 45 per cent less than the base residential rate.

But Ararat's biennial land valuations released this week show the value of rural or farm properties in the region have increased by 24.48 per cent since 2016, compared to just 3.45 per cent for residential properties and 8.69 per cent for commercial.

Systemic problems identified in Victoria's rating system

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A State Government inquiry into Victoria's rural and regional councils published in December 2017 found that there were some "inequitable aspects to the current rating system" and that a review should be implemented.

"The current rating system does not always reflect the capacity of an individual to pay, as it measures capacity through property ownership, which does not necessarily reflect available income," the inquiry's report stated.

"Some farmers are required to pay disproportionately large rates bills which do not necessarily reflect their capacity to pay."

But the inquiry also found there were many other systemic problems affecting council finances, including "increasing compliance requirements, changing regulations, council decisions to take on additional responsibilities and growing demand and expectations from the community."

Regional council services on the cutting board

The Northern Grampians Shire Council implemented a uniform 2.25 per cent rate rise in June, to prevent an average increase of 25 per cent for farmers.

Mayor Tony Driscoll said the uniform rate was a "band-aid solution" but that serious questions remained over the council's long-term sustainability.

There are about 3,500 kilometres of roads to maintain in the Northern Grampians Shire, yet its population, and rate base, is less than 15,000 people. ( ABC News: Giulio Saggin )

"We've got 41 [council] services. We are currently going through the process of reviewing all of those 41 services," he said.

"But it's a matter of then saying to the community, 'Okay, we'll cut the services' but for example, childcare, kindergartens, leisure centres, swimming pools — that's all basic stuff every citizen is entitled to."

With a population of more than 100,000, the City of Ballarat has a significantly larger rate base but is still struggling to find long-term funding for its 78 services.

"We're doing the type of services that don't really make money, they're loss makers but they're important," Deputy Mayor Daniel Moloney said in June.

"I think we've got to … make some value judgements about the type of things we want to do really well versus the type of things we might not necessarily do in the future."

More rates uncertainty on the horizon

Across Victoria's 48 rural and regional councils: residential properties make up 68.9 per cent of total valuations and contribute 69.9 per cent in total rates (a council will set a general rate in the dollar)

properties make up of total valuations and contribute in total rates (a council will set a general rate in the dollar) rural properties make up 20.51 per cent of total valuations and contribute 15.1 per cent towards total rates (a council may set a differential rate that is often lower than the general rate in the dollar)

properties make up of total valuations and contribute towards total rates (a council may set a differential rate that is often lower than the general rate in the dollar) commercial properties make up 7.9 per cent of total valuations and pay 10.4 per cent of total rates

properties make up of total valuations and pay of total rates industrial properties make up 2.5 per cent of total valuations and pay 4.1 per cent of total rates Source: Victorian Grants Commission 2016-17, as analysed by the Municipal Association of Victoria

The state's representative body for councils, Municipal Association of Victoria, has called for a review of the rates system.

But chief executive Rob Spence said the system was highly complex and that "what will be seen as fair and equitable for some will not be seen as fair and equitable for others."

Yet as the costs facing councils rise, their revenue base could face further cuts with a proposed bill in State Parliament aiming to restrict municipal charges from 20 to 10 per cent of a council's total rates revenue.

A municipal charge is a flat rate paid by all ratepayers that is not based on property values.

"What's the policy basis for that change? Where's the intellectual rigour as to why you would move from 20 to 10 [per cent]?" Mr Spence said.

Farmers back push for rates review

VFF President David Jochinke says farmers are at a disadvantage under Victoria's current rating system. ( Supplied: VFF )

President of the Victorian Farmers Federation (VFF) David Jochinke has called for $50 million to assist local councils maintain roads.

"Under current models, we can't see the long-term viability of a lot of rural councils," he said.

"They need to get either funding put into place so they have got that sustainability or services managed in a better way."

Speaking at the annual VFF conference in Ballarat, Premier Daniel Andrews said the State Government was taking a considered approach to the rates pressures facing some farmers and would detail a response "very soon."

Premier Daniel Andrews told the VFF's annual conference that the government would soon detail its response to the rates pressures facing some farmers. ( ABC Ballarat: Dominic Cansdale )

"There's then a broader piece of work that goes directly to this issue and some of the financial pressures in smaller councils that are perhaps driving these sorts of rate decisions," he said.

State Opposition leader Matthew Guy said some councils were using farmers as a "cash cow" rather than seeking an equitable spread of rate rises.

"I'd be very, very keen to work with the VFF on what you think is the best way forward with your policy committee as to how a Coalition Government could address some of those inequities without scrapping a rate cap," he said.