A tax on agricultural land, a scarce production factor in South Africa, does not meet the basic principles, such as equity, simplicity and certainty as well as cost-effectiveness of a sound tax system. A tax on agricultural land, to be administered by the most inefficient tier of government at prohibitive cost, is not an equitable tax, flouts the ability to pay principle (cashflow criteria) and is ill-suited to promote socio-economic objectives within the constraint of efficiency in the industry. Experience shows that a tax on agricultural land to promote welfare objectives is unsustainable in the longer term and that alternative strategies, as already being implemented should rather be pursued. It is clear that the newly constituted municipalities are merely looking for additional sources of tax revenue, but are unable to recover the billions of rand in rates that are in arrears in the urban areas. The proposed tax on agricultural land must be seen in conjunction with the country’s total tax regime and burden, its progressive nature to redistribute incomes and the accent being placed on the expenditure side of the budget on the provision of social services to low income households. Cognizance must also be taken of the financial burdens that have already been imposed on the agricultural industry in the form of minimum wages, the provision of housing to farm workers, the imposition of tariffs on irrigation water, the levies payable to district councils, higher tariffs for electricity, etc. Against this must be seen the poor state of the roads in the rural areas. Municipalities furthermore do not provide any services directly to the farming community and farmers have to pay for the cost of education and medical care when they make use of these services. A tax imposed on farmland should at the outmost be based on the value of the services provided to the farming community – not on the market value of the land.

The financial position of the agricultural industry must furthermore also be taken into account when an additional tax is to be imposed on it. A tax that eliminates the net return a farmer would otherwise have earned is tantamount to nationalising his property. He operates a farm, at his risk, for the government. The agricultural industry has been deregulated and is now exposed to foreign competition (some countries subsidize their exports) and receives almost no government support. Even agricultural research has been scaled down. Farmers must learn to survive in this unfriendly environment on a continent that lacks food security and where, in terms of Nepad, the agriculture industry has to play a major role to combat poverty.

Some municipalities have already imposed a tax on farmland and the farming community is aware of the insensitive and arbitrary manner in which the matter had been handled. How can it trust municipalities, who have no knowledge or understanding of agriculture, to be capable of applying and administering the powers conferred on them by this proposed act in the interests of South African economy in general and the agricultural industry in particular?

The agricultural industry had a good year in 2002, but input costs, including minimum wages, have in meantime been rising at an alarming rate whereas producer prices have been declining. The agricultural industry made a remarkable contribution in 2002 to South Africa’s overall growth rate of 3 percent, but the indications are that its contribution will be negative this year.

A tax on agricultural land will have the following effect:

• The risk of farming will increase. It must be kept in mind that the tax has no direct relationship to the cashflow generated by farming activities. Farming and investment in agricultural land are no longer attractive options;
• Agricultural land values will decline and the risk to finance agriculture will increase;
• Profit margins will be squeezed as farmers cannot pass on this tax to end users in the form of higher prices;
• Farmers will be forced to lay off more workers and unemployment in rural areas will rise in future;
• Insolvencies in agriculture will increase and total agricultural production will tend to stagnate. The argument that a tax on agricultural land will cause it to be used more productively is flimsy for it is difficult to explain why a farmer would not uitilize his available land fully if he could in the process increase the profitability of his operation.
• Investment not only in agricultural land but more so in fixed improvements will be discouraged. Agricultural land no longer provides a hedge against inflation.

There is obviously a close relationship between these two variables. Property values, including fixed improvements, are supposed to be determined by market forces but the principle of a willing buyer and willing seller cannot be ignored. In fact the use of the concept of agricultural value (based on the farm’s income generating potential) should be considered for it is on this basis that the farmer is conducting his farming operation. This is also the benchmark used by the Land Bank for the valuation of agricultural land. Political processes determine the tax rate. Often property values are inflated whilst a fairly moderate tax rate is levied, ostensibly to create the impression that the tax to be collected is reasonable and fair. We nonetheless want to stress the point that we cannot see how fixed improvements can be valued without physical inspection. Fruit trees will apparently be seen as fixed improvements but sheep obviously as moveables. How can this be defended?

It is our contention that it is humanly impossible to ensure that alike properties in the country will be uniformly valued and taxed. There is nothing in the Bill that will ensure that the same standards of valuations, although the services of valuers will be used, or uniform tariff rates will be imposed. It will be interesting to learn what the full cost of such an exercise will be. Property values change continuously and all properties need to be revalued at regular intervals. We furthermore want to stress the point that land values can also decline and that by sticking too long to certain values may in fact mean that certain properties will be over-taxed.

Section 17 of the Bill does give the Minister of Finance the power to place a limit on the rateable amount that can be levied, but one can be sure that these powers will only be applied in extreme cases. Section 18 also provides that certain rates can be phased in. It is our contention that should the Government decides to proceed with the implementation of this tax on farmland, it should be phased in gradually in order to test its effect on the agriculture industry.

Section 7(2) of the Bill provides that municipalities are not legally obliged to levy rates on certain categories. We are also looking for conformity and consistency in the application of this provision. It is our view that if a tax on agricultural land is to be imposed all farmers involved in agriculture should be treated alike. This is the best way to assess the full impact of the tax on the agricultural industry.

What value in the form of services will the farming community receive for the land taxes to be paid to municipalities? It is clear that the taxes thus collected will merely become part of the revenue pool and that there is little prospect that some sort of service, the equity principle, will be provided in return. What say will the outvoted farming community have in the drafting of budgets and in particular on the expenditures to be incurred? There is supposed to be opportunities for consultation, but this process will no doubt take that same route as the taxation on water for irrigation purposes which was introduced last year.

It is our contention that the proposed tax on agricultural land is ill conceived and that it will seriously impair the food producing capacity of this strategic sector of the South African economy and the SADC region. It is a tax to be imposed on a productive asset. In fact, many of the proponents of this tax see it as a tax on wealth. But wealth can take various forms, such as investments in shares, bonds, paintings, diamonds, etc. Why should agricultural land be singled out for this purpose when there is already a capital gains tax and estate duties that have to be paid. This tendency to discriminate against commercial farmers who have all their assets invested in agricultural land is gradually undermining their confidence and will in the end impair the agricultural potential of this country.

We assume that a tax on agricultural value will be regarded as an expenditure item for income tax purposes.