LOCAL GOVERNMENT: PROPERTY RATES BILL
SUBMISSION TO THE PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE
1. BACKGROUND
Ever since a land tax was mooted as a possible source of government income in the early nineties, Agri SA has tried to determine the objectives of imposing a land tax, or property rates for that matter, on agricultural land, especially on those land that had not been taxed previously. The following aspects were major considerations in this respect, leading to Agri SA rejecting the principle of property rates on especially newly rateable property:
The tax burden in the country already exceeding the GEAR-limit of 25% of GDP which violates against further increases in the national tax burden;
Local governments are in terms of section 227(1) of the Constitution of the RSA, entitled to a fair share of the national tax revenues; an additional redistribution mechanism is thus not needed;
The agricultural sector does not find itself in a tax-free haven as the sector is liable for paying a host of taxes like fuel taxes, estate duty, VAT on private consumption spending, import duties, RSC-levies, toll fees and income taxes;
The major so-called tax shelters have effectively been eliminated. With respect to the ring-fencing of losses from secondary trades this has been taken a step further by the Minister of Finance in his latest budget speech;
Although there is a realisation that taxes as such cannot be translated into a proportionate level of service provision to people liable for paying it, the 38 functions to be provided by municipalities in terms of section 156(1)(a) of and schedules 4(b) and 5(b) of the Constitution will almost entirely be to the exclusive benefit of urban dwellers. Markets and municipal abattoirs can justifiably be regarded as to the benefit of the agricultural sector, however, as these particular facilities are operated on a user-pays-principle, the imposition of a land tax to finance the provision of these services are obviated. In addition to this, markets and abattoirs are often profit centres under the jurisdiction of local authorities, implying that farmers are already making a contribution via cross subsidisation to the other activities / functions of local authorities;
Farmers are paying RSC-levies. The fact that rebates are granted to the farming community with respect to these levies in various areas attests to the fact that these farmers are receiving services to a limited extent. In most cases they are providing those services on their farms with no support from any level of government. The functions assigned to local authorities in terms of the Constitution are also overlapping and in most cases are identical to those included in Schedule 2 of the Act on Regional Services Councils Act, Act No. 109 of 1985. If no clear distinction between the jurisdictions of district and local municipalities are drawn, this will result in a double payment for limited service provision;
The return on investment in agriculture - the so-called rental return on land - has been scientifically calculated to be at a low level i.e. 5% on average. A tax level of 2%, which is often banded around as acceptable, will lead to a drastic reduction in the propensity to invest in agriculture. Costs for the agricultural sector resulting from property rates will not only be of an operational nature, but will also materialise in the form of a reduction in the value of capital assets;
Property rates will also not serve the so-called non-fiscal considerations often associated with such taxes on agricultural land. Agri SA believes that rates on property is a particularly blunt instrument to redress the effect of past discriminatory legislation, it will hardly support new entrants as net income will eventually be reduced, it is not needed to create a market for agricultural land, speculation in land will not necessarily be discouraged and it is not needed to induce farmers to step up productivity; and
Numerous "abnormal" financial demands are currently made on the agricultural sector like: minimum wages / cost reflective water tariffs / a new pricing dispensation for electricity / hiking input costs / unfair international competition, due to massive government subsidies allocated to agricultural sectors in developed countries, which require a more holistic approach with respect to the financial impact thereof on agriculture, than is currently the case. Obviously property rates will now also have to enter the equation.
2. RECENT EXPERIENCES
In recent times there have been some extremely bad experiences with some municipalities that took steps to introduce property rates. In certain urban areas, rates in some cases on existing rateable farmland of between 4% and 6% came about. The extension of rates to include "new" farmland was in some cases done without proper consultation in terms of either the Local Government Transitional Act or the Municipal Systems Act. Existing ordinances were incorrectly applied (i.e. Transvaal Ordinance 11 of 1977) as was revealed by the Supreme Court ruling in favour of the appellants, against the Eastern Services Council on 26 September 2002.
The most disturbing feature of the latter court case was the fact that the so-called rates were applied in an unreasonable, unscientific, technically incorrect and haphazard way. The fact that the "rates" were determined on the basis of the authority’s envisaged expenses, sounded alarm bells for the agricultural sector in the sense that the ability to pay was ignored.
These realities as well as the fact that all existing ordinances will be repealed with the commencement of the Local Government Property Rates Act of 2003, point to the need for the latter to be as comprehensive, detailed and non-arbitrary as possible. Although Agri SA does not concur with the principle of property rates on farmland, we are aware of the related competencies of local authorities in terms of the Constitution. Given the haphazard and chaotic situation currently prevailing in this respect Agri SA urged the government to release the bill. This was done during deliberations with the President and the Department of Provincial and Local Government.
3. CONCLUSION
Given the absence of clear cut objectives pertaining to rates on newly rateable agricultural land various issues of structure and principle remains unresolved. Thus, commentary on the previous versions of the property rates bill had to be of a broad and abstract nature in order to deal with a range of possible, not always necessary mutually exclusive, objectives.
In addition to the lack of clear objectives some operational issues could hitherto also not be addressed satisfactorily, viz.
The trade-off between the tax base, the tax rate and the deductibility of land tax from income tax. Given the need for tax room to be created, the subcommittee of the Katz-Commission recommended the land tax to be a provisional tax (i.e. deductible from the amount of tax as such) and not a deductible expense;
The magnitude of the tax burden or the total projected revenue, except for a few rough projections, was never calculated, making an assessment of the financial and economic impact of the tax almost impossible;
No clarity could be obtained on the delivery of services to rural areas;
Given the municipalities’ need for technical and administrative support, the cost-effectiveness was never ascertained, leaving the potential yield of property taxes (i.e. revenue from a land tax) undetermined; and
The link / relationship that needs to exist between the rates policies of municipalities and section 229(2)(a) of the Constitution i.e. to deal with property rates in relation to national economic policies, economic activities across municipal boundaries, has not been established.
The latest version of the Local Government: Property Rates Bill should at least make a serious attempt to address these and related issues (like the ability to pay) to avoid endless litigation. The Portfolio Committee on Finance when they considered a previous version of the Bill on 7 October 1999 also warned against this possibility especially if some of the above mentioned and related activities were not addressed satisfactorily.
APPROACH TOWARDS EVALUATING THE RECENTLY RELEASED BILL
Agri SA will obviously seek more clarity on the operational aspects of the bill, especially pertaining to those aspects raised under item 3 of this submission, whilst the issues of structure and principle raised under item 1 will of necessity also influence the approach towards the content of the particular bill.
Agri SA is perfectly aware of the content of section 229(1)(a) of the Constitution of the RSA, providing for local authorities to levy property tax. Given this reality, the following disposition from an agricultural perspective is aimed at providing a framework within which a sustainable, equitable and affordable property rates dispensation can be instituted on newly rateable, agricultural properties.
COMMENTARY ON THE PROPERTY RATES BILL
5.1. BASIS OF EVALUATION
Clause 39 states that the improved value of property must be the amount the property would have realised if sold on the date of valuation in the open market by a seller to a buyer.
Clause 1 defines improved value as property including improvements whilst improvements are defined as buildings or immovable structures.
The latter definition surely has residential, commercial and industrial property and not agriculture in mind, because crops are not included in this definition but will surely inflate the market value. The working capital like labour, seeds, fertiliser, chemicals as well as the value of what is standing (i.e. crops) now becomes part of the market value. Surely this is not an economically neutral dispensation.
For the sake of equity an additional definition should be inserted:
"improved value" in relation to agricultural property, means the value of the property, including improvements, determined in accordance with this Act, excepting that the value of any working capital in the form of growing crops, vegetative matters and moveable assets be specifically excluded from the definition of improvements.
Agri SA is also of the opinion that the concepts of willing buyer and willing seller are more appropriate and also better defined in legal terms.
RATES LEVIED ON ALL RATEABLE PROPERTY
Clause 7(2)(iii) indicates that a municipality is not obliged to levy a rate on property for which tenure is legally insecure as a result of past racially discriminatory laws or practices and for which it is therefore impossible or unreasonably difficult to establish a value.
This presumably means that land that could be classified as being in "tribal areas" does not have to be rated. Is this not in conflict with the principle of equitable treatment? Additionally, the exclusion of these areas from the rates base could place a severe financial burden on those landowners whose properties are rateable, especially in municipalities where a relatively large proportion of "legally insecure" land exists within their boundaries.
Thousands of land claims have been registered on farmland. In effect, the owners of the land upon which land claims have been lodged, but which have not yet been finalised (the status of the overwhelming number of claims), are in a state of limbo. Due to the uncertainty of the outcome they are generally unwilling to invest further in improving the land, or incurring input costs to maintain production on it until such time as the outcome of the claim is known. The value of this land is essentially zero. Given this situation, it could be argued that this land meets the above criterion of being "property of which tenure is legally insecure as a result of past racially discriminatory laws".
It is thus Agri SA’s view that land subjected to a land claim / claims be exempt from property rates.
The Communal Land Bill, as was indicated by the President in his most recent State of the Nation address, should also be completed as a matter of urgency with a view to establishing certainty in ownership which is a prerequisite for property rates to be implemented.
CONSTITUTIONAL CONSTRAINTS
Section 229 of the Constitution empowers municipalities to impose rates on property. There is a proviso, however, that the municipalities’ power to do so may not be exercised in a way that "materially and unreasonably prejudices national economic policies, economic activities across municipal boundaries, or the national mobility of goods, services, capital or labour".
Given the fact that the Strategic Plan for Agricultural Development released by the President represents the official policy of Government towards, inter alia economic development in agriculture, section 229(2)(a) should be based on the latter. Clearly excessively high rates will impact negatively on the core strategies contained in the plan, i.e.:
Equitable access and participation;
Global competitiveness and profitability; and
Sustainable resource management.
The most critical item in relation to property rates contained in the Strategic Plan is the priority programme regarding production costs. It is specifically stated that "lowering the overall cost of production, including a further reduction of taxes and duties on diesel and other inputs" should receive priority attention. If property rates fail to adhere to the latter programme the desired outcomes indicated in the plan, i.e. wealth creation, sustainable employment, earning of foreign exchange, improved farming efficiency, improved food security and improved investor confidence, will obviously be jeopardised.
When evaluating the impact of property rates on the agricultural economy, it should also be done in conjunction with other demand and supply factors that have an influence on the sector, e.g.
The low level of government support to the local sector compared to similar support to agriculture by developed countries. The aggregate support received by farmers in die OECD-countries as indicated by PSE’s, amounted to 31% in 2001 compared to about 2% in the case of South Africa.
The impact of property rates on the agricultural sector should also be evaluated alongside similar demands made on the cost structure of agriculture by other aspects like minimum wages, etc.
For example, a recent study on the impact of a property tax and minimum wages on irrigation farming in the Lower Orange River, indicated that the combined impact of minimum wages and property rates of 2% on land and improvements would mean that, only large farms will remain feasible, although at a drastically reduced return on investment.
Clause 71 of the bill assigns the right to the Minister of Finance to make regulations to assist municipalities to exercise their powers pertaining to any matter prescribed by the "act". Agri SA is of the opinion that these regulations should be an obligation assigned to the Minister and not a discretionary option. A careful scrutiny of the possible regulations in terms of clause 71 is necessary but we believe that it should be compulsory at least for the following:
Section 229 2(a) of the Constitution relating to the economic impact of land taxes/property rates; and
Clause 71 (1)(b) of the Property Rates Bill pertaining to the preparation, contents, adoption and enforcement of a municipal rates policy.
6. RATES POLICY
Agri SA welcomes the content of Clause 3, especially in relation to the compulsory inclusion of criteria to deal with different rates for different categories of properties, exemptions, rebates, etc.
Agri SA believes that a national framework in terms of Clause 3(3) is a must and not an option. The fluctuating nature of agricultural production due to the vicissitudes of nature should within the context of rebates and reductions form an integral part of such a national framework.
7. DIFFERENTIAL RATES
According to the bill rateable property categories may be determined according to use, permitted use and geographic area. Some thirteen-property categories are listed, with sub-categories for farms and smallholdings. [Clause 8(3)]
This categorisation is obviously aimed at applying differential rates. Agri SA is of the view that developing criteria in this respect will be basically impossible especially if each category is to receive a dedicated rate or even a maximum rate.
This could lead to endless litigation. Categorisation of properties on the basis of services used will be difficult in itself but more viable than e.g. the area in which the property is situated.
8. EXEMPTIONS, REDUCTIONS AND REBATES
In terms of Clause 14 criteria must be developed on which exemptions will be based. Agri SA believes that the ability to pay and the relative use of services should form an integral part of these criteria. The very same criteria could apply when a specific rate limit in terms of Clause 15(3) is considered. Agri SA believes that clear-cut criteria and even an overall limit set on property rates on agricultural land in terms of clause 15(3)(b) can go a long way in ensuring buy-in and compliance by the farming community.
9. VALUATION
In terms of Clause 27(1) all rateable properties must be valued. However Clause 15 excludes certain properties, e.g. property belonging to land reform beneficiaries. It needs to be borne in mind that land reform will erode the tax base of municipalities. Agri SA trusts that the cost of exclusions in terms of Clause 15 will also be shown as revenue forfeited in terms of Clause 14(3). A shortfall in this respect should be addressed by the national or provincial spheres of government as was also mooted by the sub-committee of the Katz-Commission as contained in recommendation six included in the eighth Interim Report.
10. RATIO AND LIMITS ON INCREASES
Clause 16(1)(b) contemplates a prescribed ratio of rates on non-residential property to rates on residential properties. In principle this could go a long way in arresting the misgiving with this tax system prevalent in agriculture. However, even if the ratio is fixed, the effective rate could still be of such a magnitude that it is unaffordable to the agricultural sector.
Limits on annual increases, as will be possible in terms of Clause 17, coupled with the ratio, could also be a further step in the right direction. The criteria and responsible body for determining the prescribed ratio, are not clear at this stage.
11. AMOUNT OF RATE
To maintain a neutral impact on agricultural production, rates policies of municipalities should be harmonised. National guidelines in this respect are important. The impact of moving from sliding scales, which are currently applied in certain provinces, to a fixed rate based on improved values could lead to drastic increases in the tax burden for certain farms. The transition to different rate structures should thus be monitored closely.
A fixed rate on improved values could also serve as a deterrent to further investment in agriculture. A system of distinction between site and improved values should once again be considered to deal with this.
11. AUXILIARY ITEMS
Will "land subjected to legislative prohibition of use", as is the case in the forestry industry, be treated differently in terms of valuation or rates?
The legality of the provision [Clause 25(3)] whereby a tenant can deduct rates owed by the landowner from rental due to the owner should be considered.
Clause 27(2) states that rateable property must be included in the general valuation only to the extent that a municipality intends to levy a rate on those properties. If some properties are not to be valued how will quantification of the financial impact of exemptions in terms of Clause 14(3) be carried out?
Clause 69 provides for supplementary valuations to be done in cases where the last general valuation becomes substantially incorrect. Agri SA believes that procedures in this respect should allow for the dynamic nature of land values in agriculture currently being influenced by a host of factors like crime and violence.
A previous draft of the Property Rates Bill (Clause 35(f)) released on 4 October 2000 allowed for the possibility of special valuations where "the owner of the property provides acceptable services to residents or occupiers of the property". Agri SA submits that a similar section should be included in the current bill to deal with the practical situation in agriculture.
Clause 15(g) disallows rates for a period of ten years on property belonging to a land reform beneficiary after registration of title. What criteria were applied to calculate the particular period and how will joint ventures between farmers and land reform beneficiaries be treated within this context?
Agri SA would like to thank the Portfolio Committee for the opportunity to make this submission.