Local Government: Municipal Property Rates Amendment Bill [B33-2013]: Public Hearings day 1

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Cooperative Governance and Traditional Affairs

28 January 2014
Chairperson: Ms D Mhlengethwa (ANC)
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Meeting Summary

Four stakeholders made submissions on the Local Government Municipal Property Rates Amendment Bill:

The South African Local Government Association (SALGA) was critical of the new definition of agricultural property in the Bill. Section 8(2) required that certain categories of rateable properties be determined. The municipality was left without discretion to determine categories of rateable properties through rates policies and by-laws. The Bill introduced a prohibition on levying of rates on public service infrastructure. Loss of income would have to be recovered from residential properties.

The City of Johnannesburg was likewise critical of rearing, trading and hunting game included in the definition of agricultural property. Rebates for game farms would be transferred to other ratepayers. The introduction of “public service purpose” suggested a reduced rate-in-rand was contemplated for government purposes. The decreased income would have to be borne by other ratepayers. Clause 6 could remove the right of municipalities to determine categories of property.

Ethekwini Municipality was concerned that the Bill overrode the choice of tax rates by municipalities. The amendment policy took away municipal discretion. Rates policy would have to be according to limited listed categories. Section 8(2) created confusion by introducing ownership like State owned properties and Public Benefit Organisation (PBO) properties.

The Institute of Municipal Finance Officers (IMFO) was concerned that the amendment to the definition of "agricultural purpose" would provide a rebate to properties where game was reared, traded or hunted. Other ratepayers would have to subsidise lucrative game farms. The creation of the Public Service Purpose category could lead to a rate ratio. Government would have its rate bill reduced, and thereby force other ratepayers to fund the subsidy that government sought for itself.

In discussion, the Chairperson allowed the Cooperative Governance and Traditional Affairs (CoGTA) department to provide background to the amendment process, and to respond to issues raised by the stakeholders. CoGTA was challenged both by the content of the submissions, and questions and comments from Committee Members. Concern about the definition of "agricultural property" to include game farms, was grave and general. It was seen as being detrimental both to food security farming and other ratepayers. There was concern about exemption of churches from rates and taxes. There was discussion about public benefit organisations, such as universities, who want exemption to enhance their own income, whilst being perfectly capable of affording rates. The position with regard to diplomatic property was discussed. CoGTA was asked if the impact of reduced rates for public service infrastructure had been conclusively studied. Appeal boards were discussed. There was general agreement that municipalities had different needs, and the Bill did not take that into consideration. CoGTA was confronted with the question: did it accept that ratepayers would have to take the strain if public service properties were exempt from rates, and that municipalities would have to cut their budgets.

Meeting report

Introduction by Cooperative Governance and Traditional Affairs (CoGTA)
Ms Veronica Mafoko, CoGTA Senior Manager: Municipal Finance and Viability, noted that there had been wide interest in the process, and that the Department had undertaken many engagements. The process had commenced four years before. The aim of the amendments was to deal with implementation challenges. There had been uncertainty about complex provisions. There had been ambiguities in the legislation, which had led to litigation. Some of the amendments were policy related, to strengthen the regulatory framework. The Minister lacked powers to monitor reporting. The aim also was to exclude the Public Service infrastructure (PSI) from rating. Property categorisation was tightened, through ministerial powers, to promote transparency. The definition of "agricultural property" was extended to include game farming.

South African Local Government Association (SALGA) submission
Mr Subesh Pillay, SALGA Finance Monitoring Group chairperson, noted that SALGA was critical of the new definition of agricultural property in the Bill. It proposed that the phrase remain "agricultural purpose" as opposed to "agricultural property". Section 6 of the Bill provided for the amendment of section 8 of the MPRA. Section 8(2) now prescribed that certain categories of rateable properties had to be determined. The municipality thus no longer had the discretion to determine categories of rateable properties through rates policy and by-laws. The prescription of a fixed set of categories would not allow a municipality to address specific dynamics in that municipality.

Section 13 of the Bill amended section 17 of the Municipal Property Rates Act (MPRA) through introducing the prohibition of the levying of rates on certain categories of public service infrastructure. Metropolitan municipalities had indicated that the remainder of their rates would have to increase by 4.1 to 5% to maintain the current rates income. A large portion of the increase would have to be recovered from residential properties.

Mr G Boinamo (DA) noted that the kind of usage of agricultural property determined ratings. He asked for clarification. Farming included animal husbandry and crop farming. He asked about ratings. Farmers had to be encouraged to produce for food security. There was no compensation or relief for droughts. The previous regime gave rebates for fertiliser. Farmers were alone in a crisis. Farming had been abandoned.

Mr Pillay replied that the actual use of agricultural property had to be known. If it was being put to agricultural use, there could be lower rates. The definition had to state use, not only property. It had to be asked if the land was productive. In terms of section 6, municipalities could determine additional categories of vacant land.

Mr T Bonhomme (ANC) referred to church exemption from taxes and rates. Some churches were earning millions of Rands per month. Gangsters were laundering money through churches. It had become a job creation industry, with easy money to be made. Gifts of Mercedes Benzes were made. Pastors received 4x4 vehicles on their birthdays. He asked why churches were exempted. Churches had to be investigated.

The Chairperson said that the Department had to analyse and find out how to resolve issues. Municipalities could evaluate the income of a congregation.

The Chairperson asked for an explanation of diplomatic property, in terms of section 8 of the MPRA.

Mr Pillay responded that it was not clear what category diplomatic property belonged to in Tshwane. When there was uncertainty, municipalities had to be allowed to introduce diplomatic property, as distinguished from business and commercial property. Municipalities could not create additional rateable property. Home industry was difficult to categorise.

Ms W Nelson (ANC) asked how diplomatic property was currently rated.

Mr Pillay replied that Tshwane City currently defined different rates. The draft suggested that it could not do so.

Ms Nelson asked if it was on par with valuated property, and whether there were any incentives.

Mr Pillay replied that in principle it was not discounted. It was competitive and commercial.

Mr Mzilikazi Manyike, CoGTA Executive Manager, added that amendments were aimed at ensuring equity across the board. Government and private sector used residential property, with rates like any other. It was indicated in subsection 3 that any other category could be suggested. Cooperative Governance and Finance Ministers could create other categories.

Ms Mafoko added that CoGTA was mindful of implications. Assessments had been done over four years. It had to be checked which municipalities made Public Service infrastructure (PSI) expensive. The impact of amendments on those who did so, was assessed. 71 municipalities were surveyed. The Financial and Fiscal Commission (FFC) was engaged on the financial and fiscal implications. The percentage of PSI in municipalities was insignificant. It came to one per cent. It was a higher percentage of the budget for small municipalities. Not all PSI was to be removed. Municipalities could decide to rate. Rating of PSI would be phased out over three years.

Mr Manyike added that the global economy had to be kept in mind. Issues had been looked at in 2007/08. Elsewhere there was not PSI rating. With regard to building the developmental state, the amendments were catalysts for bigger things.

City of Johannesburg submission
Mr Mbulelo Ruda, Head of Legal Services, noted that the City disagreed with the inclusion of rearing, trading and hunting game in the definition of agricultural property. The rearing, trading and hunting of game was a business activity. The rebate provided by the inclusion would have to be transferred to remaining ratepayers. The City was critical of the insertion of the definition of “public service purposes”. It indicated that a rate ratio could be contemplated for the future. The impact of a reduced rate-in-the-rand for government properties to residential rate-in-the-rand would lead to a decrease in income which would have to be borne and subsidised by business and residential rate payers.

Clause 6 amended section 8 of Act 6 of 2004. That section could have the unintended consequence of taking away a municipality’s right to determine categories of property in their rates policy. The amendment of section 16 of Act 6 of 2004 made the municipality’s rated base uncertain until a 24 month period had elapsed, because it gave the Minister the power to limit the amount in the Rand which the municipality could impose.

The City calculated that if there was a loss of income for Public Service Purpose (if zero rated) property, it would amount to R220 million.

The Chairperson asked for reinvestment to be explained.

Mr Ruda replied that provincial governments had to make the payments for appeal boards.

Mr Parks Tau, Johannesburg City Executive Mayor, referred to the impact on the domestic ratepayer. Exemption from rates was in the public service interest. The Bill would shift R400 million per annum from government to the ratepayer. CoGTA was shifting the ratio of business to residential from one to three, to one to two. Business paid less. The impact amounted to R1.2 billion per annum. Government would cut the budget by R1.2 billion per annum. The contribution of business had to stay the same. Over the preceding few years the burden of taxes had shifted to residents. The limits had been reached regarding the ability of people to afford the municipal account. Johannesburg City wanted positive credit rating. There had to be rebates to domestic properties.

Mr J Steenhuizen (DA) noted that the city had stated the impact of PSI exclusion to be 4.1% of the total budget. He asked about the difference between City and Department modelling.

Mr Tau replied that numbers had to be reconciled with CoGTA.

Ms Mafoko added that CoGTA based modelling on the global picture for that year.

Mr Steenhuizen asked if the one percent PSI exclusion impact was based on a definition in the current Act.

Ms Mafoko replied that municipalities differed in their evaluation and rating. The one size fits all criticism was unjustified. There were clauses in the Bill that recognised differences. Section 8 did not treat all municipalities the same. It was recognised that there could be other property categories. Section 8 had originally been much tighter. Section 8(3) had been relaxed, so that powers of municipalities to categorise would not be usurped. Equity and fairness were the guidelines. Public property was not being protected. If property was owned by government, it was not sufficient reason for exclusion of rebate. It would be the same as residential rates.

Ms M Segale-Diswai (ANC) asked about the position of game farms as agricultural property.

Mr Tau replied that game farms impacted on smaller municipalities. The incentive shift to game farming was not an agricultural initiative. Game farms were not on the same level as crop or cattle farming.

Ms Segale asked about funding of appeal boards.

Mr Ruda replied that the boards had to be paid by the people who established them.

Ms Mafoko said that CoGTA was not saying that municipalities should not raise rates. The national government had to monitor categorisation. Services had to be extended to communities. There had to be evaluation of how many appeal boards were needed. Legislation stipulated a minimum of one. Municipalities did not lose out. They were compensated by grants.

Mr Manyike added that municipalities charged four times more for state owned properties. It would not do for municipalities to make the state a cash cow.

Mr Tau said that rates could not be discussed without reference to numbers. There were only limited categories for rates. The Act had to be clear about rates and categorisation. A clear definition was currently lacking. There had to be clarity about the scrapping of the RCP grant, for there were budget implications. The tax burden was being shifted to residents, and they could not take any more. Households had been under pressure through legislation for the preceding five to ten years. There were impacts on the City budget. Municipalities published rate policies, and the public could comment. The shift of burden in taxation was political. A rates policy had to be transparent. The city valuer was not subjected to political pressure. CoGTA was currently prescribing to the valuer.

Ethekwini Municipality submission
Ms Fathima Khan, Senior Manager, said that the choice of tax rate was the most critical means of promoting the fiscal autonomy of local government. Section 229 of the Constitution empowered a municipality to raise rates. The amendment Bill overrode the power given to municipalities in that it was prescriptive. Section 8(2) introduced ownership in determining the category of property. Section 8 of the Act guided municipalities to formulate rates policies and identify categories of property. The amendment policy took away the discretion a municipality could exercise, as the Bill made it mandatory that the rates policy “must” be determined according to limited listed categories. Section 8(2) created confusion when it introduced ownership like state owned properties and those owned by Public Benefit Organisations (PBOs). At Ethekwini, the Public Service Infrastructure (PSI) and PBO category would benefit by a reduction of 88.4%. All other categories would increase by 5.4%, and poor and middle income earners would bear the brunt of the increase in rates.

Mr Bonhomme asked about the randage of land. He asked if land hoarding and squatting were being encouraged.

Ms Mafoko replied that CoGTA was not introducing a change in rate randaging. The Portfolio Committee had to decide what was best for all municipalities and ratepayers. The introduction of ownership and use were the drivers for categorisation of property. But sometimes ownership and use combined. Public service property was owned by the State, but the State would not be exempt. Public Benefit Organisations were not a new category, so the concept of use would not be introduced there. The choice of tax rates was up to the municipalities. CoGTA would not tinker with that. The Act provided a framework in terms of section 229 of the Constitution. The Bill had been vetted twice for constitutionality. The determination of ratios could not be done in the legislation. The Property Rates Act provided ratios and government had the power to regulate rating. The Act only made ratios possible.

Mr Steenhuizen said that there was a problem with language. “Must” was a problem in subsection 3. The term was prescriptive. There had been reports in the media about government owned property in Berea that fell into disrepair, and rates could not be raised there. Some municipalities did not rate PSI. Revenue raising powers of municipalities had to be enhanced. Municipalities were losing out because they were not rating property. It was acceptable if the government gave a police station, to take away rates. But if a college brought students, and wanted rates removed, it was a different situation. Some educational institutions had more than enough money to spare for rates.

Mr Steenhuizen asked if CoGTA accepted that ratepayers would take the strain if the public service were exempt from rates, and that it would force budget cuts.

Ms Nelson asked about outstanding debts to municipalities. CoGTA was saying that exemption would be phased in. The question was what would happen to debts owed to municipalities.

Mr Manyiki replied that outstanding debt would remain.

Ms Nelson asked about present rates, and which services were provided.

Ms Khan said that the Income Tax Act was distinct on property rates. CoGTA was trying to marry the two Acts. In her municipality, private schools were forced to be put in another category in terms of the Income Tax Act. Ordinary schools had to pay extra so that private schools could get a different rate.

Ms Mafoko replied that EThekwini was blurring lines. PBOs were not a creation of CoGTA. It was linked to the Income Tax Act. The PBOs had income tax obligations.

Ms Khan requested that “property” and “owner” be distinguished. The PBOs ownership had to come out, as it gave rate reduction and rebates. EThekwini had refused universities PBO status. Rates were miniscule compared to benefits, in their case.

Briefing by the Institute of Municipal Finance Managers (IMFO)
Mr George Van Schalkwyk, Chairperson of the IMFO Valuation and Rating Forum, noted that the Act had excluded game farms from the category of use of agricultural land. Trading or the hunting of game were seen as lucrative business activities that yielded profit whilst not really contributing to food security. The proposed amendment to that definition of agricultural purpose would provide a substantial rebate to properties where game was reared, traded or hunted. Other ratepayers would be expected to subsidise game farms.

The creation of the Public Service Purpose (PSP) category of property suggested that a rate ratio was contemplated. The draft rate ratio proposed to reduce the rate-in-the-rand for government properties to 25% of the residential rate. That would appear to be an attempt by government to reduce its rates bill and to force other ratepayers, including residents, to fund the subsidy that government was seeking for itself. Municipalities were already assisting the government by performing unfunded and underfunded mandates. Adding a further direct subsidy to government in the form of a rates rebate would exacerbate the situation. Taking away the right of municipalities to determine the categories of properties in their own rates policies removed their responsibility to review that aspect of their policies as part of the annual budget process.

Ms Louise Muller, IMFO President, said that it would be advisable to conclude matters before June 2014. She asked about the difference between Public Service Infrastructure and Public Service Purpose.

Mr Van Schalkwyk remarked that PSI rates were 25% of residential rates. PSP as a category would have impact if a rate ratio was established. The question was why a category was created if it would not be used.

The Chairperson summarised issues raised during the meeting. There were problems with the definition of mining and agricultural property; criteria for rebate and reduction; differential rates of taxation; classification of categories of property. It was felt that the term “must” in section 8(2) was problematic. It was pointed out that amendments impacted on the budgets of municipalities. The Bill would be gone through clause by clause by the Committee in future meetings.

The Chairperson adjourned the meeting.


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