EEHCStrategy

1

PROPERTY RATES BILL dplg RESPONSE TO QUESTIONS
POSED BY PORTFOLIO COMMITTEE ON PROVINCIAL AND
LOCAL GOVERNMENT November 18, 2003


2
MAIN ISSUES TO BE RESOLVED

• Choice of Rates Base
• land and improvements or land only?
• Choice of Rating System
• uniform or variable?
• Constitutionality of Exclusions
• Public Service Infrastructure
• Protected Areas
• Rating of Agricultural Land
• Religious, Welfare and Charitable, Independent
  Schools

3
CHOICE OF RATES BASE

• With regard to the base
• Why have we chosen to rate land and improvements
  versus land only?

4
ARGUMENTS FOR BASE BEING LAND ONLY

• If only land is rated, owner will have incentive
  to develop land to fullest use
• Counter argument
• Little quantitative evidence
• Several other factors that affect land
  development - no empirical evidence to support
  that property rates play major role
• Issues such as comfort, space, investment play
  major role

5
ARGUMENTS FOR BASE BEING LAND ONLY

• Cost of valuation process is lower
• Counter argument
• Same number of properties have to be valued
  regardless of the base
• Valuing land and improvements together is
  administratively easier and more objective - more
  sales data available

6
ARGUMENTS FOR BASE BEING LAND ONLY

• Land rating has a strong relation to notion of
  public good
• Counter argument
• Assumes that land is largely undeveloped and that
  State controls most of land - not true in South
  Africa

7
ARGUMENTS FOR LAND AND IMPROVEMENTS

• Provide more comprehensive measure of affluence
  so likely to be more progressive
• Easier to assess than land only
• More sales data available
• Total property value is concept most property
  owners understand

8
ARGUMENTS FOR LAND AND IMPROVEMENTS

• Politically more acceptable
• Lower nominal rate needed to generate same
  revenue
• Current practice shows that two-thirds of
  municipalities have historically included land
  and improvements in their rates base
• Administrative costs will not be prohibitive
• To the extent that there is a trend in developing
  countries is towards improved value

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TREND IN OECD COUNTRIES
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TREND IN CENTRAL EASTERN EUROPE
11
TREND IN LATIN AMERICA
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TREND IN CARIBBEAN
13
TREND IN ASIA
14
TREND IN AFRICA
15
RESULTS FROM dplg CASE STUDIES

• Property rates base and total amount collected in
  rates will increase as a result of base shifting
  from land only to land and improvements
• 7 in Greater Tzaneen
• 5 in Matjhabeng
• 20 in Mbombela
• 48 in Ulundi

16
RESULTS FROM dplg CASE STUDIES

• Increase in rates income will be used to reduce
  rates burden on current ratepayers, particularly
  in the residential sector
• Residential sectors share of property rates will
  fall
• From 70.6 to 50.4 in Ulundi
• From 56.7 to 39.4 in Phokwane
• From 34.4 to 29 in Mbombela

17
RESULTS FROM CITY OF CAPE TOWN STUDY

• If rates base were changed from land and
  improvements to land only
• Residential properties would have borne a higher
  incidence of rates than commercial properties
• Share of residential properties would have
  increased from 30 to 55
• Within each residential and commercial area,
  shift would have occurred from properties with
  high-value improvements to those with little or
  no improvements

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CONCLUSIONS FROM STUDIES

• Residential sector will bear smaller proportion
  of total rates bill relative to commercial sector
• Poorer property owners will bear a smaller
  proportion of total rates bill relative to
  wealthier owners
• Rates base and rates revenue for municipalities
  will be optimised
• Results comply with governments national
  objectives and White Paper on Local Government

19
CHOICE OF RATING SYSTEM

• With regard to the rate
• Why mandate a uniform rate (same rate on land and
  improvements) and not a variable rate?

20
REASONS FOR UNIFORM RATE

• Determine fiscal capacity of municipalities
• Enable national monitoring and prescription
• Achieve equitable treatment of citizens
• Easier for people to understand and engage in
  rates policy consultation process

21
REASONS FOR UNIFORM RATE

• If we allow for variable rate
• Some municipalities might opt for zero rating
  improvements tantamount to the base being land
  only i.e. a non-uniform base that we have already
  argued against
• Valuers will have to arrive at separate values
  for land and improvements - subjective and will
  not realise optimal revenue base

22
RESULTS FROM dplg CASE STUDIES

• Ethekwini
• Rates land and improvements at uniform rate for
  residential property but at variable rates for
  commercial, industrial, government and
  non-industrial
• If it rates land and improvements at a uniform
  rate, rates burden on residential properties will
  fall
• Rates burden will fall for low value and increase
  for high value residential property

23
RESULTS FROM dplg CASE STUDIES

• Phokwane
• Rates land and improvements at different rates
• If it rates land and improvements at a uniform
  rate on all properties, rates burden on
  residential properties will fall from 56.7 to
  39.4
• Rates burden will fall for all classes of
  residential property

24
CONCLUSIONS FROM STUDIES

• If we have a uniform rate instead of a variable
  rate
• Rates burden will be lower for residential than
  for commercial sector
• Low-value residential property owners will pay
  less than high-value residential property owners
  - more equitable
• Will enable newly emerging middle class to afford
  property since their relative rates burden will
  be lower that that for the rich

25
CONSTITUTIONALITY OF EXCLUSIONS

• Is there any constitutional basis for the
  exclusion of property from the municipal rates
  base?
• Can Section 229 (2) of the Constitution be used
  to exclude property rather than to regulate it?
• Can the framework in clause 3 (3) of the Property
  Rates Bill be used to create mandatory
  exemptions?
• Is everything in clause 15 (2) of the Property
  Rates Bill consistent with Section 229 (2) (a) of
  the Constitution?

26
CONSTITUTIONAL BASIS FOR EXCLUSION

• Section 229 (2) (b) of the Constitution provides
  the constitutional basis for exclusion since the
  term regulate includes the power to describe
  circumstances under which a municipality would
  not be entitled to impose property rates

27
CONSTITUTIONAL BASIS FOR EXCLUSION

• The constitutionality of this power to exclude
  would depend on whether or not such a limit or
  restriction violates Section 151 (4) of the
  Constitution
• The national or a provincial government may not
  compromise or impede a municipalitys ability or
  right to exercise its powers or perform its
  functions.

28
CONSTITUTIONAL BASIS FOR EXCLUSION

• Section 229 (2) (a) of the Constitution cannot be
  used to exclude property - only when a
  municipality has exercised its power can a
  question arise as to whether or not it has
  violated Section 229 (2) (a)

29
USE OF 3(3) TO CREATE MANDATORY EXEMPTIONS

• The national framework in 3 (3) cannot be used to
  create mandatory exemptions
• Only Parliament has the power to exclude - not
  the Minister

30
CONSISTENCY OF 15 (2) WITH SECTION 229 (2) (a)

• Given that 229 (2) (a) cannot be used to justify
  exclusions, the consistency of 15 (2) is not an
  issue
• Legal opinion recommends that 15 (2) be delinked
  from 15 (1)
• Are exclusions in 15 (2) consistent with 151 (4)
  of the Constitution?
• Impact would vary from one municipality to
  another so must be very careful when specifying
  exclusions

31
PUBLIC SERVICE INFRASTRUCTURE

• Does the public service infrastructure benefit
  the public directly?
• Should structures be taken out of the definition?
• How do we deal with State-owned vis-a-vis
  privately owned?
• What is current practice with regard to rating of
  public service infrastructure as defined in the
  Bill?
• Recommendations for treatment of public service
  infrastructure

32
BENEFIT TO PUBLIC

• Only infrastructure that benefits the public
  directly must be included in the definition
• Thus, ancillary infrastructure, which is part of
  the cost of doing business (e.g. railway lines
  used by Eskom to transport goods) should not be
  excluded from rates
• Must remember that any exclusion deprives
  municipality of much-needed revenue and may
  violate Section 151 (4) of the Constitution

33
TREATMENT OF STRUCTURES

• Structures that house the infrastructure are
  improvements and hence should be rated
• Decision made to take out power stations and
  substations out of part (c) of definition

34
STATE-OWNED VIS-A-VIS PRIVATELY OWNED

• Level of State ownership - Eskom and Transnet
  100 State owned, Telkom only 41
• Do enterprise make a profit? If State owned
  enterprises are given preferential treatment for
  rates purposes, how does this affect equitable
  treatment of competitors?
• Tariffs of Eskom and Telkom are independently
  regulated not so for Transnet
• Eskom, Transnet and Telkom pay income tax - so
  rates are deductible as a cost of doing business
• Decision that only State-owned infrastructure
  should be considered

35
CURRENT MUNICIPAL PRACTICE

• SALGA canvassed municipalities on current and
  preferred treatment of public service
  infrastructure
• General position of 5 municipalities who
  presented on August 13, 2003
• Public service infrastructure forms an important
  source of rates revenue
• Any exemptions should be at the discretion of
  municipalities

36
CURRENT MUNICIPAL PRACTICE

• dplg conducted subsequent survey in August 2003
• Survey questionnaires sent to 23 municipalities
• 14 municipalities are not rating any components

37
CURRENT MUNICIPAL PRACTICE

• 9 municipalities are currently rating some of the
  aspects of public service infrastructure such as
  power stations and substations, runways and
  aprons, telecommunication towers, water supply
  reservoirs, and servitudes
• 2 municipalities indicated that exclusions would
  have a significant negative impact (Moses Kotane
  would lose about 5 while the City of Cape Town
  0.95 of its rtaes revenue) 7 municipalities
  said it would not impact negatively.

38
RECOMMENDATIONS

• Define publicly controlled in the Bill
• Owned by or otherwise under the control of the
  state, including
• A public entity listed in the PFMA
• A municipality or
• A municipal entity as defined in the Structures
  Act

39
RECOMMENDATIONS

• Change definition of public service
  infrastructure in the Bill
• Publicly controlled infrastructure of the
  following kinds
• Roads
• Water or sewer schemes serving the public
• Electricity schemes serving the public
• Schemes for transporting gas or liquid fuels
• National railway system
• Runways or aprons at international, national or
  provincial airports
• Waterways at harbours
• Rights of way, easements and servitudes in
  connection with the above

40
RECOMMENDATIONS

• Only public service infrastructure connected with
  the provision of free basic services (water,
  sanitation and electricity) should be given
  special consideration
• ALL public service infrastructure should be
  valued at a national level to ensure uniformity
  and consistency of valuations
• Values apportioned to each municipality who is
  then free to rate infrastructure as it sees fit
• Exception Basic service infrastructure whose
  value will be reduced

41
PROTECTED AREAS

• Sub-Committee agreed to exclude privately owned
  land declared as a protected area in terms of the
  Protected Areas Act
• Agreement reached that exclusion would remain
  until protected area is de-proclaimed
• Arrear rates on privately owned de-proclaimed
  land to be levied to base date of valuation cycle
  where
• Property owner withdraws from agreement
• Minister has cancelled agreement due to breach of
  contract by owner
• Term developed or used to be retained

42
RATING OF AGRICULTURAL LAND

• What is the rationale for rating the agricultural
  sector given the concerns raised by KWANALU, Katz
  Commission and independent expert?

43
RATING OF AGRICULTURAL LAND

• Summary of concerns raised by agricultural sector
  in public submissions
• Rating agricultural land will lead to a drop in
  value of agricultural land
• The definition of improved value is ambiguous
  in relation to farmland (not necessarily the same
  as market value)
• Use value versus improved value

44
RATING OF AGRICULTURAL LAND

• Summary of concerns (cont.)
• Level of taxation is quite high (2) and main
  trading partners do not rate agricultural land or
  rate it at low levels
• Farmers are already being taxed (RSC levies) and
  their tax burden will increase, affecting
  international competitiveness
• Municipalities deliver virtually no services to
  farmland - 38 functions provided by them mostly
  benefit urban dwellers

45
RATING OF AGRICULTURAL LAND

• Summary of concerns (cont.)
• Property rates on agriculture will impact
  negatively on between 5 and 8 desired outcomes
  of the Strategic Plan on Agriculture
• Privately owned conservation and protected land
  should be excluded from property rates
• Possibility of deferred rates in the event of
  natural disasters

46
KATZ COMMISSION RECOMMENDATIONS
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BACKGROUND

• Katz Commission appointed in 1995 to consider
  introduction of land tax in South Africa
• Subcommittee presented initial report in November
  1995
• Despite the vehement opposition to a tax on rural
  land by organised agriculture, mining and
  hospitality industries, Subcommittee was of
  opinion that such objections are best heard at
  the local level, where consideration of level of
  services to be provided from proceeds of the tax
  can be fully accounted for

48
RECOMMENDATION

• Katz Commission supported recommendation that,
  although a rural land tax should not be levied at
  a national level, in principle, such a tax at
  local government level should be given serious
  consideration
• Sufficient international experience on
  implementation and administration of such a tax
• Imposition would not represent a new tax in South
  Africa had been previously levied by former
  Cape Province on divisional council level (and
  subsequently in all provinces at local council
  level)

49
KATZ COMMISSION RATIONALE FOR LAND TAX

• Rural land tax
• Has potential to raise revenue for rural
  municipalities
• Will give greater fiscal autonomy to rural
  municipalities
• Will seek to entrench horizontal equity
  principles in taxation since urban dwellers
  liable for property rates

50
FURTHER INVESTIGATION

• Katz Commission mandated further investigation
  and Subcommittee presented further findings in
  August1998
• Findings were presented in the interim phase of
  local government transformation

51
KATZ COMMISSION MAIN RECOMMENDATIONS

• Tax status of rural rates
• Subcommittee recommended that rural property
  rates be a provisional income tax payment
• Katz Commission, however, recommended that rural
  property rates be deductible for income tax
  purposes
• Neutrality and horizontal equity require that tax
  treatment of rural property rates be similar to
  urban property rates

52
KATZ COMMISSION MAIN RECOMMENDATIONS

• Tax base
• Katz Commission recommended that
• All land within municipal boundaries must be
  included in tax base
• Tax base should exclude mineral and water rights
• Tax base should be improved value (land and
  improvements)

53
KATZ COMMISSION MAIN RECOMMENDATIONS

• Tax rate
• Katz Commission recommended uniform rate on
  improved value of land
• Tax rate and desirability of rate-capping
• Katz Commission recommended that there should be
  no setting of the tax rate or rate-capping in
  legislation in the interest of allowing rural
  municipalities to play the role envisaged for
  them in the Constitution

54
KATZ COMMISSION MAIN RECOMMENDATIONS

• Method of valuation
• Subcommittee recommended that tax be based on use
  value rather than market value
• Katz Commission, however, is of opinion that
  market value is a more certain and equitable
  method of valuation than use value

55
KATZ COMMISSION MAIN RECOMMENDATIONS

• Tax relief measures
• Katz Commission recommended that guidelines
  should be provided regarding
• Types of tax relief measures that are allowable
  and
• Conditions under which such measures may be
  implemented (such as prescriptions for more
  transparent and participative processes)
• Experience has shown that exemptions, rebates and
  tax deferrals should be kept to an absolute
  minimum

56
CONCERNS RAISED BY AGRICULTURAL SECTOR IN PUBLIC
SUBMISSIONS
57
CONCERN

• Rating agricultural land will lead to a drop in
  value of agricultural land
• 1 property rate on agricultural land will lead
  to a 16 to 20 reduction in land values
• 5 property rate would reduce land value to 20
  or make land worthless
• Therefore, agriculture recommend a maximum rate
  of 0.5 on improved value of farmland as this
  would reduce land values by between 8 and 10.

58
dplg RESPONSE

• Problems with assumptions
• Assumes very high rate of capitalisation (80 to
  100). Studies have found wide-ranging rate
• Oates (1969) 66
• Edel and Sclar (1974) 50
• Reinhard (1981) 31
• Palman and Smith (1998) 63
• Shapiro et al (1999) 20
• Katz Commission assumes a 26.5 rate of
  capitalisation.

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dplg RESPONSE

• Problems with assumptions (cont.)
• Assumes cause and effect relationship between
  property rates and fall in land values. Other
  factors, such as location, productivity of land,
  proximity to infrastructure and amenities, also
  affect land values
• Ignores the fact that municipal expenditure on
  services in the area may actually lead to land
  values going up

60
dplg RESPONSE

• Problems with assumptions (cont.)
• Rental return is a static ratio which is used to
  capture the effect of a dynamic situation in
  which income and costs change over time
• Ignores key variables such as
• Rate of inflation
• Rate of growth of cost and revenue streams
  associated with property (costs of doing
  business)
• Rate of income taxation
• Tax deductibility of property rates

61
CONCLUSION

• The serious problems with assumptions do not
  justify maximum limit of 0.5
• Besides, Katz Commission recommended that there
  should be no rate-setting or capping at the
  national level

62
CONCLUSION

• Also, there are sufficient clauses in the Bill
  that protect key sectors like agriculture and
  mining
• Minister, with concurrence of Minister of
  Finance, can limit the rate or growth in rate of
  categories of property
• Minister can prescribe a ratio between
  residential and non-residential property
• In addition, any exemptions and rebates granted
  to agricultural sector will have to be borne by
  other property rate payers. Municipalities are
  best placed to determine these trade-offs

63
CONCERN

• Use value as opposed to market value as a method
  of valuation for agricultural land

64
dplg RESPONSE

• The main disjuncture between use value and market
  value for agricultural land arises in the case of
  peri-urban areas.
• In other cases, use value is the same as market
  value
• If you apply market value in peri-urban areas, it
  will lead to better utilisation of land
• Market value is used as method of valuation for
  determining capital gains tax

65
CONCERN

• The definition of the term improved value is
  ambiguous in relation to farmland
• Improved value for farmland is not the same as
  market value (which includes the value of
  standing crops)
• Value of standing crops should, therefore, not be
  included in value of property

66
dplg RESPONSE

• The method of valuation is market value.
• This implies that the value of annual crops and
  growing timber will not be considered in
  determining the value of the land

67
VALUATION OF AGRICULTURAL PROPERTY

• There is generally accepted valuation practice to
  arrive at the market value for agricultural land
• If one legislates that vineyards, orchards etc.
  should not be considered in the valuation of
  agricultural property, then one would be
  departing from market value and it would be
  tantamount to arriving at land value for that
  piece of agricultural property
• The method of valuation for the capital gains tax
  is market value vineyards and orchards are
  considered in the determination of market value
  but annual crops and growing timber are not

68
PROPOSED WORDING

• In determining the market value of an
  agricultural property, the value of any annual
  crops and growing timber on the property that
  have not yet been harvested as at the date of
  valuation must be disregarded.

69
CONCERN

• Level of taxation is quite high (2) and our main
  trading partners do not rate agricultural land or
  rate it at low levels.
• This negatively influences our ability to compete
  internationally

70
dplg RESPONSE

• Independent expert acknowledges that developing
  countries rate agriculture
• Issue of competitiveness is acknowledged but this
  has to be dealt with at a national level - cannot
  make this a local problem
• National government dealing with this in WTO
  negotiations
• Katz Commission has shown that a 2 tax on land
  will reduce land values by only 12.32 (compared
  to KWANALUs 32 to 40).

71
CONCERN

• Farmers are already being taxed through the RSC
  levy and their tax burden will increase with the
  introduction of property rates on farmland
• This will again affect international
  competitiveness

72
dplg RESPONSE

• Farmers are not the only ones who pay the RSC
  levy all other sectors pay not only the RSC levy
  but also property rates
• In fact, some parts of the agricultural sector
  have received favourable treatment with regard to
  property rates because some farms were outside
  municipal boundaries other farms have
  historically been rated

73
dplg RESPONSE

• It is imperative that all property owners are
  part of the property rates system and contribute
  equitably to financing local government
  activities
• Municipalities, in particular rural ones, have
  huge developmental challenges and property rates
  are important for sustainable development in
  these areas

74
CONCERN

• Municipalities deliver virtually no services to
  majority of inhabitants on farmland
• Farmers sometimes provide many of these services
  themselves
• 38 functions to be provided by municipalities are
  largely to the benefit of urban dwellers

75
dplg RESPONSE

• Property rates are not tariffs they are the most
  important source of general revenue to
  municipalities
• Revenue is used to provide services that benefit
  the community as a whole as opposed to individual
  households - firefighting services, building and
  operating clinics, parks and recreational
  facilities, funding municipal administration and
  costs of governance

76
dplg RESPONSE

• It is not only urban areas that have access to
  these services farmers access these as well
• Also, farmers make use of towns that act as
  service centres and benefit from overall
  infrastructure provided in towns

77
dplg RESPONSE

• The provision of housing, health and basic
  services is essential for productivity of
  farmworkers which translates into increased
  productivity on farms and consequently profits
  for farmers

78
dplg RESPONSE

• One should not assume that the whole agricultural
  sector is a homogeneous entity in this regard
• In some farms, owners provide good services and
  treat workers well but this is not the case
  across the country
• Many articles, including article in Natal Witness
  (September 3, 2003) draw attention to human
  rights abuse on farms

79
dplg RESPONSE

• Complaints ranged from illegal evictions to lack
  of social services, lack of access to health
  care, education and so on
• Municipalities face problems in accessing farms
  because they are private property
• Farmers can participate in the community
  consultation process and apply for rebates on
  good cause

80
CONCERN

• Property rates on agriculture will impact
  negatively on between 5 and 8 of desired outcomes
  of the Strategic Plan on Agriculture

81
dplg RESPONSE

• Other taxes such as income taxes and VAT also
  have this effect
• The issue is not whether or not property rates
  will have this effect but whether or not they
  materially and unreasonably prejudice national
  economic policies
• In any event, we can no longer use Section 229
  (2) (a) of Constitution to justify exclusions

82
CONCERN

• Privately owned conservation and protected land
  should be excluded from property rates

83
dplg RESPONSE

• Some, but not all privately owned protected land
  should be excluded
• Danger of excluding all land proclaimed by
  national or provincial legislation
• Might lead to discernible impact on rates base
  for municipalities

84
dplg RESPONSE

• Only land declared in terms of national (not
  provincial) legislation for the following
  purposes should be excluded (provided it meets
  national norms and standards)
• Special nature reserves
• National parks
• Nature reserves (only some categories)

85
CONCERN

• How do you deal with natural disasters and
  climatic conditions that are beyond the control
  of farmers drought, floods, etc.?

86
dplg RESPONSE

• Allow for the possibility of deferred rates by
  explicitly providing for it in clause 23 (1) (b)

87
CONCLUSIONS

• Agricultural sector should not be excluded from
  property rates
• No limits should be imposed on property rates for
  agriculture
• Definition of market value should be clarified in
  legislation to avoid confusion
• Deferred rates should be explicitly provided for
  in legislation
• Consideration of agricultural sector in rates
  policy of municipalities

88
CONCLUSIONS

• Agricultural sector should not be excluded from
  property rates
• No limits should be imposed on property rates for
  agriculture
• Definition of market value should be clarified in
  legislation to avoid confusion
• Deferred rates should be explicitly provided for
  in legislation
• Consideration of agricultural sector in rates
  policy of municipalities

89
DECISIONS TAKEN BY SUB-COMMITTEE

• No exclusions for agriculture
• Method of valuation
• Existing use No
• Market value Yes
• Given that method of valuation is market value
• Annual crops and growing timber not considered in
  valuation
• Vineyards, orchards considered in valuation
• No tax rate setting or capping consider
  provision that representatives from particular
  sector can approach Minister

90
DECISIONS TAKEN BY SUB-COMMITTEE

• Consider workers accommodation and schools and
  services provided by farmers in rates policy of
  municipalities for rebate purposes
• Newly rateable property consider including
  property formerly outside municipal boundaries
  before December 5, 2000
• Yes to tax deferment but no to national
  exclusions in case of natural disasters (taken
  care of by national policy)
• Bona-fide farmers More information needed

91
RELIGIOUS, WELFARE AND CHARITABLE, INDEPENDENT
SCHOOLS

• Places of worship and residence of minister
  excluded
• Definition of welfare and charitable legally
  problematic hence change to include some public
  benefit activities (welfare and humanitarian,
  health care, education and development) performed
  by PBOs
• One year grace period to be granted to
  organisations that conduct the above public
  benefit activities and are currently exempt from
  rating

92
RELIGIOUS, WELFARE AND CHARITABLE, INDEPENDENT
SCHOOLS

• Consideration needs to be given to including
  these categories of property in Clause 8 of the
  Bill
• No exclusions for independent schools will be
  considered in rating policy
• All agreements reached in all Subcommittees are
  tentative pending review in Committee

93

• THE END
• THANK YOU