1 property rates bill: dplg response to questions posed by portfolio committee on provincial and...
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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 lowerCounter 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
9
TREND IN OECD COUNTRIES
L = LandImprv = Improvements
Australia L or L + Imprv
Canada L + Imprv
Japan L, Imprv
Germany L + Imprv
U.K L + Imprv
New Zealand L or L + Imprv
Netherlands L + Imprv
Ireland L + Imprv
Sweeden L + Imprv
10
TREND IN CENTRAL & EASTERN EUROPE
Hungary Unimproved Value (vacant land) or Imprv
Latvia L + Imprv
Poland L + Imprv
Russia Land for land tax, Imprv for property tax
Ukraine L
Czech Republic L & Imprv separately
Estonia L
Albania Agricultural L, Imprv
Slovenia Imprv
11
TREND IN LATIN AMERICAArgentina L + Imprv
Brazil L + Imprv
Chile L + Imprv
Colombia L + Imprv
Nicaragua L + Imprv
Mexico L + Imprv
12
TREND IN CARIBBEANJamaica L
Grenada L + Imprv
Barbados L + Imprv
St Lucia L + Imprv
Trinidad L + Imprv
13
TREND IN ASIA
China L + Imprv
India L + Imprv
Indonesia L + Imprv
Philippines L + Imprv
Thailand L + Imprv
Malaysia L + Imprv
Hong Kong L + Imprv
Singapore L + Imprv
Taiwan L
Lao L + Imprv
14
TREND IN AFRICA
Botswana L + Imprv
Guinea L + Imprv
Kenya L + Imprv
Lesotho L + Imprv
Malawi L + Imprv
Namibia All options but in practice mainly L & Improv separately
Swaziland All options (legislation)
Tanzania Imprv only
Tunisia L + Imprv
Zambia L + Imprv
Zimbabwe All options (legislation)
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 sector’s 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
18
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 government’s 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 municipality’s 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
47
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.
59
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 KWANALU’s 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
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