Synopsis
And Suggested Way Forward
For the
Property Rating Bill 2003
To
Portfolio Committee, DPLG
From
Godfrey R. A. Dunkley
(International Union for Land Value Taxation)
17 June 2003

EXECUTIVE SUMMARY

As a result of all the discussions over the last five weeks around the Property Rates Bill 2003, it is appropriate to reflect on all the issues raised and put them into perspective. This document aims to do this and to put forward recommendations to assist with the continuing process. It also aims to clarify some contentious issues.

It is first necessary to define the purpose of municipal rating before arriving at the rating policy. Having established the rating policy with appropriate definitions, it is then necessary to establish what needs to appear on the valuation role together with guidelines and order of preference of valuation methods to be used.

The Valuation Roll assists in determining the Rating Policy for the next Financial Year. However the Rating Policy will determine what details are necessary for future Valuation Rolls. Two totally different functions but still closely intertwined.

The annual assessment rate can only be established once details of the valuation role are available, and the rating policy and the necessary budget for the ensuing year have been approved.

In view of the fact that all land in RSA now comes under a municipality, a large
number of new problems have manifested. If possible, basic principles should
be found, that will:

Simplify the method of valuation and provide a register of all property in
the country.

Alleviate poverty and unemployment by making unused land available to
the market at reasonable prices.

As vacant prime land is brought into production so other land will
become available for use. The domino principle will automatically
apply. Land will gradually become available for those presently
deprived of access to land and self- employment.

RATES

The following section introduces basic principles inter-woven with issues raised during the discussions.

PURPOSE OF GOVERNMENT

Protect the land and resources
Maintain law and order
Exercise justice
Provide national services
Enhance value of all land
Collect land rent as a source of revenue

PURPOSE OF LOCAL GOVERNMENT

Maintain a sound budget
Manage local civic affairs
Provide necessary infrastructure
Provide facilities, services, roads, transport etc.
Add value to land
Improve quality of life for all

Let each contribute in proportion to the advantages and privileges
that they enjoy through ownership of land to the exclusion of all others.

SOURCE OF LOCAL GOVERNMENT REVENUE

Land value rates according to market value
A smaller amount on improvements where necessary
Profit (loss) municipal services (electricity, water, waste disposal)
Government subsidies


Highly developed areas should support underdeveloped areas.

Developed areas derive value from previous Government and Local Government investment in infrastructure and the growth of the community.
Improvements are the result of private investment and application of labour.

UNIFORMITY

Uniformity will be achieved by basing rates on the benefits derived by individuals from ownership / tenure of specific portions of land as assessed, in a free market, by market value of land excluding improvements.
The market value of land is determined by:
market price assuming willing buyer and willing seller or
genuine offers rejected
Good government and local governments give value to land on which privately owned improvements stand.

WHAT TO RATE

Value is given to land by the actions and investments of government, local government and society as a whole
Value of land is not influenced by the presence or absence of improvements
Market value of land is a measure of both the total advantages and disadvantages attached to ownership
Market value is the lowest price payable to exclude all others from that land
Land value rating is the legitimate source of rates

The Hon. Minister Sydney Mufamadi publicly stated;

"No one will reap what they did not sow."

Land speculators and owners of vacant land are reaping, in land values, what they did not sow! Only taxes on land, or Site Value Rating, can retrieve a portion.

Conversely, rating improvements is a case of
Local Government reaping what it did not sow.

Who plants the crop reaps it.
Whoever walks away from land without planting looses it.
Ancient and Tribal Custom

RATES POLICY

Rates policy should attract capitol investment, growth, construction and employment
Rates policy should help improve quality of life for all
Rates policy should not penalise investment
Rates should not discourage improvement and maintenance
Improvements belong to the individual and should not be rated

EXEMPTIONS FROM RATES

Many uses of a public and social nature add value to surrounding land far in excess of their own value.

National game parks
Non profit nature reserves
Public roads both national and local
Public benefit organisations
Places of worship
Schools, colleges, crèches
Public parks and gardens, swimming pools, school and town playgrounds, libraries and fire brigades
Hospitals and clinics
Free public car park areas
The total value of exempt land could be less than that of vacant land.

EXCLUDED FROM PROPERTY MARKET VALUE

A number of items are naturally excluded from land values and would be valued and possibly sold separately. These include;

Crops, orchards, plantations, livestock
Machinery fixed or not
Equipment
Stock and furnishings
Goodwill

There were a number of different objections because of the lack of clarity on these points. Common practice would be the guide.

The above should not be confused with rights, consent use, servitudes, leans etc. that are attached to the title deeds together with town planning.


VALUATION ROLL

OBJECTIVE

Record as accurately as possible the market related values of both land and improvements (separately) by whatever method is most suitable
Allow for transparency and check against recent sales
Accept and settle objections to valuations
The final accepted valuation should provide a record of the total value of all property within that municipality. Over a period of time the changes in total value will provide a yardstick for assessing the long-term performance of each municipality.

Uniformity in preparing valuation rolls should assist in determining the
VUNA Awards.

PREFERENCE OF VALUATION METHODS

A decision that was taken and is common practice in RSA is that valuations would be derived from market values based on willing buyer and willing seller.

There is no single and best method of arriving at market values. However there is a body of qualified and experienced Valuers whose art is to use the most applicable method with the end in view of establishing values as close as possible to market values. These will be continuously reviewed, as additional information becomes available.

The following are given in order of preference;

Market sales price of land netted back/forward to valuation date
Market sales price for demolition purpose plus cost of demolition and site clearing
Market sales price of land and improvements (Valuers to determine value of improvements to establish land value)
Improvement value from replacement cost less depreciation less obsolescence
Rental value of land only, capitalised to give land value
Assessed value based on permitted use and or potential productive capacity
Self evaluation subject to sale at that price to government or local government (allow plus 10% for inconvenience)
Heritage and protected buildings or structures based on present use or restrictions
DETAILS ON VALUATION ROLL

Should include full identity of ownership by individuals together with Identity Numbers and percentage holdings in partnership, closed corporations, private companies and limited liability companies
Show clearly unusual factors that will add to or detract from value compared to adjoining land, i.e. view, flood paths, unstable soil, noise levels etc.
Show both site value and improvement value even for exempted properties
Where applicable value land proportional to surrounding land allowing for size
Separate categories for unused land, and for under utilised land (i.e. improvements less than say 25% of land value.

APPROVAL OF VALUATION ROLL

Provision should be made for official approval of the roll before all objections have been settled so that the rates can be established for the new financial year.

It is common practice to implement the new Roll / Budget and apply rates calculated on the contested amount. Payments are then corrected retrospectively once the matter has been settled.

The Municipal Budget cannot be held in abeyance by drawn out legal battles over a few contested valuations.

ASSESSMENT OF RATE

All exemptions, rebates, reductions and deferrals would be deducted from the total land value to obtain a rateable valuation roll amount. This would then be divided into the desired budget amount to obtain a percentage or rate in the Rand to be applied.



It is the writer’s view that a minimum of 2 cents per Rand
on land values should be stipulated in the Bill

INVOICING

For the sake of transparency the invoice should show the municipal valuation of both land and improvements, the cents in the Rand applicable, and the amount payable with payment date. This is fairly standard practice.


DEFERRED PAYMENTS

Provision should be made to defer a portion of payments where elderly owners are asset rich and cash poor. The municipality would in effect carry a second bond over the property. This would have to be approved, taking into account other bonds and market value. Approved amount to be well below market value less other bonds. Interest should be charged. Payment to be made at time of sale or transfer of property.

There is no valid reason to give additional rebates or exemptions
to pensioners and thereby make a free gift to their heirs.

BASIC REBATE

The Basic Rebate allowed for in 15, (2) (h) would be approximately R5000 on land value if Site Value Rating were applied.
All residences including staff married quarters and workers’ family housing on mines and farms should be included for this rebate. This will encourage provision of housing. Define the minimum size of house.



At a later stage an additional rebate could be considered
for owner-occupiers in order to encourage home ownership
and improved social stability .

COMMENTS ON FARMING

Rating land values only according market value will remove problems expressed about various crop durations and timing of harvest
Crops are similar to stock in a supermarket which is not rated
Fencing, barns, irrigation systems etc. to be valued for record purposes and transparency but not for rating
Land to be valued on potential use not current use
All housing to be rebated off land value at say R5000 each to encourage housing of labour
Mountainous parts of farms more suited to nature reserves could be bequeath to national reserves either outright or offset against rates at say 2.5% per annum of such area. Such areas would not be valued with the remainder of the farm.
Rating farms on land values only will help to discourage speculation in land and stability of market prices

Land values in the valuation roll should be adjusted upwards to match rejected offers to purchase. If rates were to be paid on these values then market prices would soon stabilise at levels consistent with potential use, thereby discouraging speculative withholding.

The incentive to put land to good use is nearly three times as great
with Site Value Rating

COMMENTS ON TOLL ROADS

Good highways add value to land all over the country. This increased value can be retrieved by an additional rate on land values directly effected.

It is not advisable to have privately owned toll roads as these cream off into private hands what truly belongs to government whilst at the same time placing an additional burden on the economy and particularly the poor.

CONCLUSION

The writer has presented a vast amount of factual evidence to show that Site Value Rating should be the preferred method of rating.

The case for Total Value or Improved Value Rating has presented no case studies to prove benefits for the disadvantaged. However we do have evidence to show that even a small step away from Composite Rating to Total Value Rating results in a downturn in building plans and construction.

We therefore recommend that the bill make provision for freedom of choice between Site Value Rating, Composite Rating and Total Value Rating and with a minimum rate of 2 cents in the rand on site values.

Municipalities should keep good records of new construction so that this may be assessed against the existing total land values and against total improvement values.


Let experience prove the case. The world will be watching!