Payment of dividend from water supply and sewerage business
Learn how a council-owned local water utility may pay a dividend as a return on investment to its owner council(s).
Guidelines for council dividend payments for water supply or sewerage services
The Regulatory and assurance framework for local water utilities PDF, 1613.11 KB includes Guidelines for council dividend payments for water supply or sewerage services (section 4). Councils making a dividend payment from a surplus of their water and/or sewerage business must meet the expectations set out in section 3 and section 4 of the regulatory and assurance framework.
Under section 409(5) of the Local Government Act, a council may pay an annual dividend from its water supply and sewerage business surplus to its council. A dividend is a return on investment paid to the ‘shareholder’, which in this case is the council responsible for managing and investing in the local water utility’s water supply and sewerage functions. Such dividends may be paid for each business at the end of the financial year after meeting the Guidelines (see section 409(7)(a) of the Local Government Act).
A county council may pay a dividend to its constituent councils on a pro-rata basis, based on the number of assessments.
NSW Local Government has adopted the principle of ‘competitive neutrality’ in its business activities as part of the National Competition Policy, which is being applied throughout Australia at all levels of government. The framework for its application is set out in the June 1996 NSW Government Policy statement titled ‘Application of National Competition Policy to Local Government’, which should be read in conjunction with the department’s ‘The Pricing & Costing for Council Businesses – A Guide to Competitive Neutrality’ (July 1997).
These documents set competitive expectations of council-owned water utilities depending on revenues. Specifically, a Category 1 utility, with water revenues greater than $2 million, should separate its accounts, implement a complaints-handling mechanism, and set prices so annual cost recovery by a council's water supply or sewerage business includes taxes or tax-equivalents (excluding income tax).
The dividend comprises 2 parts: a dividend calculated for tax-equivalents, and a dividend calculated from the surplus.
Dividend for tax equivalents
All council-owned water supply or sewerage businesses must make a dividend payment for the amount calculated as the annual tax-equivalent payment.
The tax-equivalents are reported in council’s water supply and sewerage businesses’ special-purpose financial statements (SPFS) in their annual financial reports.
The upper limit for tax-equivalent dividend payments from each of a council’s water supply or sewerage businesses is set at $3/assessment.
The council may apply the dividend for tax-equivalents for any purpose under the Local Government Act or any other act, including local community and charitable purposes.
To ensure ongoing commercial viability, prices should be set so annual cost recovery by a council's water supply or sewerage business includes taxes or tax-equivalents (excluding income tax).
Dividend from surplus
Before taking a dividend payment from a surplus of the council’s water supply and/or sewerage business, a council must:
- calculate any dividend payment in accordance with the methodology in section 4.2
The methodology for the calculation of surplus and payment of dividend from a surplus of the water supply and/or sewerage business is set out in section 4.3 of these Guidelines.
- be able to demonstrate there is a surplus
The council must demonstrate there is a surplus in the council’s water supply and/or sewerage business.
- demonstrate full cost-recovery pricing and developer charges
The council must demonstrate full cost-recovery pricing and cost-reflective pricing including developer charges in place for the water supply and/or sewerage business.
- have in place effective, evidence-based strategic planning in accordance with section 3 of this regulatory and assurance framework
The council must have in place effective, evidence-based strategic planning, as set out in section 3 of this regulatory and assurance framework.
- demonstrate financial reports are a true and accurate reflection of the business
The council must demonstrate with an unqualified financial audit report of the special-purpose financial statements for the water supply and/or sewerage business, that the water supply and/or sewerage special-purpose financial reports are a true and accurate reflection of the business.
- demonstrate that the overhead reallocation charge is a fair and reasonable cost
The council must demonstrate with an independent audit report of cost allocation of the water and/or sewerage business, that the overhead reallocation charge to the water supply and/or sewerage businesses is a fair and reasonable cost.
Calculation of surplus and maximum dividend
The calculation of surplus and payment of dividend from a surplus of the council’s water supply and sewerage businesses is subject to the following conditions:
- The dividend must be calculated based on the income statement of the business activity in council’s audited special-purpose financial reports. The department’s dividend payment form gives a step-by-step process for calculating maximum dividend from surplus.
- The dividend from surplus must not exceed 50% of this surplus in any one financial year.
- The dividend from surplus must not exceed the number of water supply or sewerage assessments as of 30 June of the relevant year multiplied by $30 less the dividend for tax equivalents.
- The total dividend from surplus paid in each rolling 3-year period must not exceed the total relevant surplus in the same period.
Councils facing major capital expenditure for new or replacement water supply and/or sewerage infrastructure should defer paying a significant dividend from their surplus. Such a payment would directly increase the customers’ bills. Such capital expenditure in any financial year is defined as that which exceeds 3% of the current replacement cost of the council’s water supply or sewerage assets.
Provision of information to the department
Following council indicating in an open meeting of the council as required by s.409(7) of the Local Government Act that section 4.2 and 4.3 of the Guidelines PDF, 1613.11 KB and any direction under s 409(6()b) of the Local Government Act have been complied with, a council should give to the department:
- council’s minutes resolving achievement of required outcome (as per section 4.2) and its decision of payment of dividend, including the amount of dividend
- statement of compliance and statement of dividend payment
- dividend payment form with its calculation of maximum dividend
- council’s special-purpose financial statements for the dividend year
- unqualified independent financial audit report for water supply and/or sewerage business(es)
- independent audit report verifying that overhead reallocation charges are fair and reasonable.
The department will access the local water utility’s current strategic planning assessment and pricing outcomes to confirm the council has in place effective, evidence-based local water utility strategic planning, in accordance with this regulatory and assurance framework.
The department will assess the information supplied and give advice to council and/or the minister of any non-compliance with the Guidelines.
Resources for councils
Previous revisions of these forms are also available for payments from surplus for the 2021-22 year only (councils can use either the current forms or these forms):