SACOB

Property Rates Bill – Commentary

1. Introduction
SACOB is a business organization that through its affiliated membership structure represents some 35 000 businesses both large and small throughout South Africa. As an organization representing a large number of independent Chambers of Business/Commerce, Trade Associations and individual corporate enterprises, it strives among its other activities to speak on behalf of the formal business sector on various legislative issues that impact on business. In one-way or another the Property Rates Bill will affect all South Africans, no sector more so than the business sector. It is in that context that Sacob makes comment on the proposed legislation.

2. Background
In respect of Local Government legislation, SACOB made submissions on the Discussion Paper (June1997), the Green Paper (Dec 1997), the White Paper (April 1998), Local Government Structures (July 1998), Local Government Systems (May 2000) and individual Chambers of Business/Commerce made various inputs to the Local Government Boundaries Commission (1999). On the issue of ‘land tax’, mention must be made of a Sacob submission to the Katz Commission of Inquiry into Taxation in December 1996. With regard to Property Rates, it is for noting that a number of municipalities have pre-empted the proposed legislation and have implemented property rates on agricultural land. These municipalities must be compelled to fall in line with the proposed legislation as and when it is enacted.

In its earlier submissions on Local Government, SACOB argued in favour of the maximum degree of autonomy being granted to local government. Such autonomy should in theory provide for the most realistic degree of accountability. Understandably, all ratepayers tend to think of the costs of the services they vote for and the level of service provided. For its part, Business has argued that because it contributes almost three quarters of the tax base of practically all local government structures, it should have a right to be consulted on both rate and service levels. In addition it should be allowed to engage in efforts to bring about efficiencies in the expenditure activities of local government.

3. General Comments
3.1
Sensitivity. Service and property rates are and will remain a sensitive issue. This is because most ratepayers have a good idea as to what they are charged each year for rates. This is in contrast to the vague, if any, idea they have on what they spend on VAT each year (an equally sensitive issue). For the many voters who are not property owners and believe that they are unaffected by the proposed property rates, they are deluding themselves. Everyone will be affected, if only in an indirect manner. The sensitivity over property rates was well illustrated at a recent Property Rates Workshop held in Gauteng at which many of the interests represented advanced reasons justifying the need for them to be granted an exempt status in respect of any proposed property rate regime.

3.2 Broad Base. The objective of any property rating system must be to retain the broadest base possible and thereby ensure that the rate itself is kept at a low level. Sacob has previously expressed misgivings as to the suitability and viability of this tax instrument in its application to rural land. Those misgivings relate to: -

The very real prospect of double taxation (i.e. two arms of government taxing the same source).

Despite the intentions of Clause 3 (2) (a), the inequalities in the tax burdens between areas and between individuals.

The fragility of the tax administrative capacity of many local governments.

3.3 Exemptions, reductions, rebates. The issue of adopting statutory exemptions for selected categories of property (e.g. churches, schools, charitable institutions) is complex and is a matter on which there is no unanimity of agreement within the Chamber.
In order to give effect to the maintenance of a broad tax base, some would argue against the adoption of any statutory provision for exemptions. Not only would the administration of such exemptions be burdensome, but it can only be effected in a discriminatory manner thereby leading to unintended distortions. Property tax exemption is a simple instrument. It can also bring political benefit with the accompanying threat of misuse. It can and has been used to encourage certain types of economic activity (e.g. manufacturing, hotels, residence, agriculture) over a period of time. Whilst not opposed to select incentive measures, Sacob would prefer such measures to be more transparent, accountable, and flexible. Ideally, the promotion of such activities should be by way of direct grants or bounties that would keep costs clearly before the public eye and be subject to withdrawal should abuse be exposed or performance reveal shortcomings.

3.4 Agriculture and Property rates. As applicable to agricultural land, property rates will in future constitute a fixed, inescapable cost. The ability to pay property rates depends upon the amount of income received by the property owner. Thus it is reasonable to expect that agricultural land will have to be categorised into classifications well in excess of those set out in Clause 8 (d) and 8 (f). Classification will have to take into account the type of land use, the level of productivity, climate, and other factors that characterize the annual yields from the land. Current market values do not reflect the taxable capacity of agricultural land and a more accurate index of that capacity would be its capitalized productivity value. Whether that is administratively feasible remains to be answered. Property rates must not be based upon the value of standing crops, orchards, forestry, etc. The legislation must specify the exclusion of these items. In addition Sacob submits that, unless the agricultural industry is to develop according to the whims of local government councillors, a rate ceiling must be provided for in the legislation. In other countries where agricultural land is subject to rates they are generally set below 1%.

3.5 Forest lands and Property rates. In a more specific agricultural context, the problem of devising a suitable property rating system for forest lands must ensure that such lands are sustained on a permanent production basis. Forest crops do not mature annually and even in cases where systematic management results in the harvesting of a given proportion of the annual growth, property taxes at levels that equal or exceed annual returns will seriously undermine sustainable forest production. In other words property rates on such lands must be within the forest owners ability to pay. If there is to be any uncertainty as to the manner in which different local authorities will treat forest lands, it will result in serious disruptions to the industry. Some agreed, standardize, system should be adopted possibly under the regulations that the Minister is empowered to issue. In order to exclude the possibility of double taxation, such property rates should be treated as a rebate against a company’s/individual’s income tax. Furthermore, where an affected taxpayer has an assessed loss the land tax should be treated as part of normal income tax and be subject to refund.

3.6 Property rates delinquency. The introduction of this legislation reveals a determination to enlarge the revenue collection options available to local government (in this instance by way of property rates). In the light of the apparent weaknesses in the local government administrative capacity, there must be proposals offered for dealing with those payment delinquencies that will arise. In other words, given a track record of poor financial management in so many local authorities, there must be measures set out for handling delinquencies. This must not be left to the Minister’s discretion under a regulatory decree.

3.7 Power devolution versus Administration capacity. Despite the serious weaknesses that are evident in local government structures, Sacob, as broad principle, has been opposed to the centralization of power particularly as applicable to the functions and responsibilities of local government. The Chamber continues to favour the principle of maximum devolution of power. However, until those weaknesses have been overcome some trade-off may have to be introduced in a way that will reward administrative performance and penalize failure.

4. Specific Comments.
Clause 3.
Adoption of a rates policy. This clause requires a municipal structure to adopt a property rates policy that must fulfill seven broad aims (equity, exemptions, rates impact, etc). Towards securing some degree of equitable treatment of ratepayers, various categories of property are set out in Clause 8 (3). The comments made in para 3.4 cover the concerns that Sacob has over agricultural land rating. Sacob notes the provision made in Clause 16 (1) (c) that is to guard against ‘unreasonable discrimination’ between three types of business related property. The term ‘unreasonable’ is vague and open to subjective interpretation. In practice it is based upon a concept of ability to pay. The legislation sets out the powers to give effect to property rates and their enforcement, but there is no satisfactory provision for addressing the problem of property tax delinquency. Arguably, under Clause 71 the Minister is to be empowered to regulate how tax delinquency is to be overcome (foreclosure, etc).

Clause 7. Rates to be levied on all rateable property. Section (2) (iii) is vague and requires to be better defined. Such a provision constitutes no more than a written in exemption. Sacob views on exemption are set out elsewhere.

Clause 8. Differential Rates. For purposes of uniformity in interpretation by local governments, it would be advantageous to define certain of these property categories (e.g. unused farm property). In a related definition the term absent owner (Clause 26) requires clarification.

Exemptions, reductions and rebates. In support of the argument for all property to be brought into the tax rating net, certain people would propose the exclusion of any exempt status provision in the legislation {see Clause 3 (2) (b) (ii), Clause (3) (2) (c), Clause 3 (3), Clause 7 (2) (b), Clause 14 (1), (2) and (3)}. If individual interests believe that they should be granted a rebate on the property tax, they must be accommodated under the provisions of Clause 3 (d) (e) and (f). As indicated earlier, there are conflicting views on this issue within Sacob.

Constitutional constraints. Clause 15 (5) allows the Minister responsible for Local Government ‘with the concurrence of the Minister of Finance’ to issue guidelines to assist municipalities in the exercise of their powers to levy rates. Unless exercised with great care, the burden of property rates - particularly as imposed on agricultural land - can and will lead to tax delinquency and the threat of foreclosure. Sacob submits that in respect of issuing such guidelines, it would be desirable to provide in the legislation for appropriate consultation with the Minister of Agriculture and Land Affairs. Sacob would urge the inclusion of a clause to the legislation in which agricultural land would be subject to a property tax not exceeding 1% of its productive value. Regrettably, maximum limits invariably become the norm. Thus, if that rate were to be adopted by local governments as the norm, Sacob believes that the financial viability of many agricultural operations would be seriously undermined. Limitations on the taxes levied on properties can take the form of: -

a maximum rate for certain specified purposes, and

overall limits that establish a maximum aggregate rate

Ideally, it requires a combination of constitutional limitations of tax levels, statutory limitations and a strong budget system to control the amount of taxes levied on property.

4.6 Limits on annual increases of rates. Clause 17 permits the Minister of Finance to set limits on the percentage property rate increase. Sacob supports this measure even though the imposition of a limitation system from a central authority detracts from the principle of power devolution – a principle for which Sacob declares its support. Should the policy of inflation targeting be vogue at such times in the future when increases are to be set, some meaning might be attached to government’s purpose to control inflation by the use of the declared ‘inflation target’ limits.

4.7 Compulsory phasing in of certain rates. Clause 18 sets out a formula for the phasing in of rates, as well as a provision for granting an extension to the length of the phasing in period. This instrument must be employed effectively so as to ensure that no hardship is experienced in those areas where property rates have been absent or inordinately low.

4.8 Special rating areas. Clause 19 (2) (b) states that ‘before determining a special rating area …’ a municipality ‘must obtain the consent of the majority of the members of the local community in the proposed special rating area …’ Clarification is required as to what that majority constitutes (e.g. special meeting at which a vote is taken, referendum, etc?).

Johannesburg May 2003