Property Rates Bill:hearings

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Cooperative Governance and Traditional Affairs

12 May 2003
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Meeting report

PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE
13 May 2003
PROPERTY RATES BILL: PUBLIC HEARINGS

Chairperson:
Mr Y I Carrim (ANC)

Documents handed out:

South African Council of Churches Submission
Independent Schools association of South Africa Submission
South African National Parks Submission
Western Cape Nature Conservative Board Submission
Botanical Society Submission
Organisation Development Africa (ODA) on the Property Rates Bill
Coalition of Traditional Leaders of South Africa Submission
Financial and Fiscal Commission Submission
COSATU Submission
Wendy Machanik Properties Submission
Banking Council Submission
Local Government Property Rates Bill (B19 of 2003)
Catholic Institute of Education Submission
SALGA Submission on the Property Rates Bill

SUMMARY

The general sentiment expressed was that the principles of the Bill were welcomed, although varying degrees of concern were expressed over aspects of the Bill.

In the afternoon, the committee heard submissions from the South Africa Council of Churches, Independent Schools Association of South Africa, South African National Parks, Western Cape Nature Conservative Board and Botanical Society of South Africa. It was a common cause among the presenters that the proposed Bill would have severe impact on the property owned by organisations performing public benefit activities. They argued that it was in the national interest to exempt such organisations from property rates taxes, as there was a symbiotic relationship between those organisations and local governments.

MINUTES
Report on Property Rates Bill
Workshop by Organisation Development Africa (ODA)
Mr Nico McLachlan of the ODA presented a report on the major issues emerging from the Property Rates Bill Workshop. His report was divided into:
- an overview of participant contributions;
- an overview of key issues;
- questions and issues to be considered in preparation for public hearings.

Under issues emanating from the workshop, Mr Boshoff mentioned the following:
1. Conceptual Issues:
- what does Local Government property rates pay for?
- the difference between valuation and rating
- how will vertical and horizontal redistribution of land be effected?
- the issues of what to value and what to rate, i.e. land or land and improvements

2. Issues of Policy and Principle
- diversity of the tax base (in the various provinces)
- extension of the tax base and possible exclusions to the tax base
- differing views on public infrastructure
- differentiation and phasing in of rates

3. Implementation Issues
- Capacity of local government politicians to take informed rating policy decisions
- Capacity of local authorities to build and maintain property and valuation data bases
- Capacity to manage appeals processes
-
4. Technical Issues
- the synchronisation of legislative processes and time tables
- the management of the interface between this bill and the Communal Property Rights Bill
- improvement of drafting, definitions, descriptions, ambiguity of interpretation, eg. 'market value', 'owner',
'permission to occupy', 'new ratable property'.

Mr McLachlan suggested that the criteria to be used in forming a standard policy framework for the country, were legal acceptability, transparency, technical proficiency, and fairness.

Challenges would include developing property record information to facilitate the collection of taxes in rural areas, where there are no legal or administrative structures. In the case of tribal lands and communal properties, there is the challenge of how to establish ownership of the land. Also it would be hard to determine market value of properties in places like these, where there is no market. It would be additionally challenging to make payment of property taxes acceptable to people who previously had not paid at all.

Discussion
Referring to the "there is no market" comment by Mr McLachlan, Mr A. Lyle (ANC) stated that it was wrong to say that land has no market value.

Mr McLachlan stated that the findings on market value by the Bell and Bowman Lincoln Institute of Land Policy (February 2002) was in regard to the market value of communal lands, and not that of rural lands.

The Chairperson, however, stated that there was no such thing as land that could not be valued.

Mr P. Smith (IFP) felt it would be useful to know how the rates issue is treated elsewhere in the world especially in those countries analogous to South Africa.

Mr A. Prinsloo (Dept of Land Affairs) said that rural areas are situated far from the cities. If they were to pay municipal property rates, what would they be paying for? According to him, they were not receiving any services.

Mr R Bosomworth (Rates Action Group Chairperson) asked if there had ever been a property tax reform process where one looked at the credibility of the process. What was the process that happened prior to the Bell and Bowman study?

Ms J. Manche (DG) said that the Dept had spent five years on research, looking at international practice, and speaking to people throughout the country. They had also had the benefit of the insight of the Katz Commission Report on land tax.

South African Local Government Association (SALGA) Submission
Mr P. Skosana presented SALGA's submission to the Committee, in which various amendments to the definitions and interpretations were proposed.

The Chairperson commented that although the specific suggested amendments were helpful, it would have been more helpful if SALGA had supplied reasons for these proposed amendments, as well.

Financial and Fiscal Commission (FFC) Submission
Mr B. Khumalo (Manager: Fiscal Policy Analysis) presented FFC's submission, which he stated, was guided by the Commission's mandate.

Although the Commission was basically in agreement with the Bill, it warned of the negative implications for those people who had previously not paid municipal property rates, such as rural dwellers. It also cautioned that the actual collecting of taxes would prove problematic.

The Commission welcomed the principle of annual rates increases [as stated in Part 3(17), as it gives the Minister power to control macro-economic objectives]. However, it recommended that for clarity's sake, the clause should refer to rate bands within which increases could occur, rather than "limits", which could imply either floors (lower limits) or caps (upper limits).

Coalition of Traditional Leaders of South Africa Submission
Inkosi M. Mzimela, Chairperson of the National House of Traditional Leaders, spoke on behalf of the coalition of traditional leaders of South Africa, in which he urged the Portfolio Committee to invite the Coalition to all future events which related to them.

He stated that the Coalition was in principle opposed to the levy of rates on traditional communities. Traditional communities should not be levied in order to bolster the dwindling finances of the municipalities. Land in traditional communities are communally owned, and they belong to family units, not to individuals. There are no title deeds. The Coalition was opposed to the provision of title deeds, which would open people up to the rent system, through which they would be disadvantaged in land ownership. He felt there was a real danger that the 13% of land owned, would be taken away from traditional communities. He proposed the amendment of Chapter 12 of the Constitution. He made a further proposal that the Bill, in its present form, with regard to traditional land, be drastically amended, to concur with previous legislation.

Discussion
Mr Goosen (ANC) mentioned that in its submission SALGA had not substantiated its appeal to change Section 49 of the Bill.

Mr B. Solo (ANC) asked if SALGA was opposed to an oversight role at municipality level.

Mr B. Nobunga (ANC) mentioned SALGA's welcoming of the exemption of property valued at under R15 000, but wanted to know in which ways the poor should be assisted.

Ms C. Lobe (ANC) asked if people in rural areas were paying rates. With regard to SALGA's observation on Section 30(3), she stated that this provision derived from the Constitution. She needed to receive clarity on the nature of the problem perceived by SALGA, adding that the specific issue went around municipal valuers. Lastly, she asked why SALGA was lobbying for ward committees.

Responding for SALGA, Ms S. Makotoko answered only some of the questions due to time constraints:
- there was already an obligation on the MECs to monitor the municipalities. The provision therefore seemed unnecessary.
- Ward committees should be promoted in order to allow local committees to be part of the discussions.
- The reason for suggesting an amendment to Section 49, was simply to make it clearer.

Mr Roger Godsmark (Forestry SA) informed the Committee that certain rural municipalities have already introduced property rates. He wanted to know what would happen to those properties which had recently entered into the tax band.

The Chairperson asked if it was legally sound at this point in time, to compel rural property owners to pay property rates.

Mr Dube (DPLG) replied that if the land was classified as a property, then it could certainly be levied. In response to Mr Godsmark, he said that his question would require further discussion.

Mr Mulder (FF) asked, from a FFC perspective, if the market value would be less than exemptions. He also wanted to know to what extent that constituted a problem. He mentioned the possible negative effects of exemptions and reductions.

Ms R. Southgate commented that revenue would have an impact on equitable share.

Mr Goosen asked, with regard to property ratings on farmlands, if the responsibility for paying such rates should be handed over to farmers, or to farm dwellers.

The FFC response was that it had not been the intention of the submission to address the R15 000 exemption issue. A problem would arise when, beyond R15 000, the potential base in a particular area for property rates is calculated. The FFC was basically focusing on a market value approach to property rates. On the negative attitudes with regard to exemptions and reductions, the Constitution acted as a guideline as to what the tax system should be like. Uniform principles must be applied both nationally and provincially. According to procedure, the provinces propose a taxation system to Government which then makes a uniform decision. The same procedure should be followed for deciding on rebates.

Ms G. Borman (DP) asked whether the owner or user of rural properties should be taxed. She stated that even should the owner be taxed, that cost would somehow filter down to the user through user charges.

Mr Kam Chetty (Boland District Municipal Manager) said that a key principle in public finance is not to penalise jurisdictions for circumstances beyond their control. The capacity which municipalities have to implement levy rates should first be examined.

He stated that the critical issue was how to structure an equitable tax formula. This formula should also be structured as simply as possible.

Ms Lobe referred to the statement by the FFC of the municipality asking the MEC to grant specific concessions and exemptions.

Mr Chetty responded that this was a complex issue. The negative impact of granting concessions and exemptions might be managed through encouraging a certain degree of competition amongst municipalities.

Mr Lyle asked Mr Mzimela to clarify his statement that the repercussions of imposing municipal rates in rural areas would be "too ghastly to contemplate".

Mr Ngubeni asked if all rural areas fall under municipalities.

Ms Sandra Botha asked for clarity on Mr Mzimela's statement that 87% of land was owned by foreigners.

Mr Mzimela responded to the last question, saying that rural people did not know who was in control of land, adding that the system provided access to anybody to buy land. Asking people with no money to pay levies, would eventually cause them to lose their properties. Additionally, it is not easy to govern people who are unhappy. He noted that the national and provincial houses of traditional leaders are also statutory bodies. He felt that municipal structures should be the primary structures in urban area. The municipal and traditional structures have concurrent roles. The Constitution does not make it clear as to whether traditional structures have supportive or leading roles.

Due to time constraints, the Chairperson asked members to direct further questions to the Coalition in writing.

The Chairperson explained that according to his understanding, the Bill did not prescribe that people in rural areas must pay rates. That would be left up to the municipalities to decide. However, the Coalition has lots of lobbying power at municipality level, to the extent that levies could be successfully opposed within such municipalities. He said it could be a long time before levies were actually imposed there. He pointed out that it was hardly possible that people in rural areas would own properties valued at over R15 000, making them exempt from paying levies, in any event. He gave his assurance that the Committee would examine the Bill in a manner that was traditional leader-sensitive.

Congress of South African Trade Unions (COSATU) Submission
Mr S. Kgara presented COSATU's submission, stating that the Union supported the Bill in principle, notwithstanding some concerns.

They were concerned that the establishment of the Spatial Rating Districts would entrench the disparities between high and low income areas. The submission called for exemption from property ratings for public benefit organisations, which the Bill terms as "welfare and charitable organisations".

It was submitted that the provisions of the Bill were mere "guidelines", and that the Bill failed to adequately serve as a means to redressing the inequalities of the past. Unless some restrictive measures were introduced, there would be very little the Bill could do in correcting present inequities.

Wendy Machanik Properties Submission
Ms Wendy Machanik, Managing Director, stated that her company was in wholehearted support of the aims of the Bill, with some concerns.

She pointed out that although estate agents would support market value as a benchmark, valuation methodology was important, adding that there was a limited number of qualified valuers within the Council.

She identified the problem of arrear rates as placing huge burdens on municipalities. She suggested the mass outsourcing to a computer-aided property valuation system. This would circumvent the problem of the Bill not outlining valuation methods.

Ms Machanik felt that schools and institutions or properties used for religious purposes should also form part of the rates base, requiring a special rating method on a national basis. She suggested huge rebates for schools, so that those schools in poorer areas are not over-burdened.

She felt that the decision to give the Minister unlimited powers to increase property rates should be curtailed by setting caps to no greater than the CPI, subject to a maximum increase, or to the same level of the inflation rate.

She noted that the City of Cape Town had experienced problems in its valuation process, as home-owners were reluctant to allow them onto their property, and into their homes, because of security fears. She suggested that in future, property owners should be notified in advance of inspection, and that they be supplied with the details of the official who would be making the inspection.

Ms Machanik suggested that objections to valuation results be made to an independent body, instead of to the same person who performed the valuation, after which a final appeal could b made to the Appeals Board, as outlined in the Bill.

Banking Council Submission
Mr N. Lala-Mohan (General Manager) presented the Banking Council's submission to the Committee, in which they made comments on various aspects of the Bill. Additionally, they proposed a few amendments, including the deletion of Section 118(3) in its entirety. They were particularly concerned with the definitions of the terms, "property" and "owner", which might prejudice banks holding mortgage bonds by compelling them, as the mortgage holder, to be liable to pay rates.

Discussion
Mr Smith (IFP), referring on the COSATU submission, said that where additional levies (Special Rating Districts) must be paid, it should only happen where people could afford these higher levies. Those were specifically people who wanted to maintain elite residential distinctions because of the value of their properties. He stated that the Bill makes some provision for the collection of rates. With regard to Section 15(3) of the Bill, he added that it was important to view the Bill in context. COSATU was opposed to any form of rent-fencing to cross-subsidise municipalities. However, he suggested, special ratings in districts could act as a precursor to rent-fencing.

Mr Ngubeni drew attention to Ms Machanik's statement that people living on agricultural land do not benefit from municipalities. He wanted to know if she was suggesting that those people did not make use of libraries, roads, and so forth. He stated that although the services which they received might be limited, they did, however, enjoy certain benefits.

He could not understand why she held that schools and users of religious programme property should be taxed.

He claimed she was being inconsistent in saying that the benchmark on evaluation should be on market evaluation, while later saying that market value should not apply.

Mr Smith alluded to Ms Machanik's approval for market value. However, she also said that when property values rise, there should not be a rise in tariffs. What would happen, he asked, when property values change, considering the generally fluctuating nature of the market?

The Chairperson referred to Ms Machanik's strong reservations expressed regarding the Bill's provisions for additional rates to be levied, asking if those reservations were realistic. How far did those reservations actually reflect the real situation?

Ms Machanik replied to the Chairperson that her comments reflected sentiments by a vast majority of people, and were not merely subjective. She added that in Gauteng, people were suspicious, believing that this was an additional ploy by the Municipality to engender more funding by saying that they needed to finance all the services that were expected of them.

Ms Makotoko responded that rates and taxes are definitely a serious problem in Gauteng, where the arrear rates are very high. She added that the problem is exacerbated because municipalities often do not pick up arrears for the first six months, after which the banks are prevailed upon to absorb the loss / "take the knock".

Afternoon session:

South African Council of Churches submission
The SACC endorsed the principles underlying the Property Rates Bill. However, it raised concern about the potential impact of the legislation on public benefit organisations, in general, and religious institutions, in particular. Firstly, the exclusion threshold for residential property (set as "at least the first R15 000 of the value of all residential property) is too low and the exclusion threshold should not be lower than the amount of the standard of the housing subsidy.

They also asserted that the wording of some of the clauses of the proposed Bill were outdated and had to be brought into in line with other tax legislation, in particular the Income Tax Act which makes provisions for relief from taxation for "public benefit organisations" rather than for "welfare and charitable organisations". Furthermore they called for the precise definition of the term "welfare and charitable organisations" within the context of the Act. A case could be made for special treatment for property normally used as places of public worship as they are sources of spiritual guidance and development for communities.

Independent Schools Association of South Africa submission
On behalf of private and public schools, ISASA also supported the broad principles underpinning the Bill as it provided a framework for the flow of fiscal revenue for the municipalities. However, it raised concerned about the potential impact of the Bill on education institutions more particularly schools. They argued that it was in the national interest to exempt all schools from property rate taxes because schools were central to government's national economic policy and there has always been a symbiotic relationship between schools and local government, as most of the property that belong to schools was used for the benefit of the community. Hence ISASA made the following recommendations:
-That there was a need for a clear definition of a public benefit organisation as well as the need for the provision of a year's grace period as part of the transitional arrangements, to enable previously exempt owners (e.g. schools and religious organisations) to apply for reductions or exemptions. They also pointed out that the Bill had to provide for an appropriate practice, methods and standards for valuing educational property.

Catholic Institute of Education submission

Ms Baker endorsed the submission made by the South African Council of Churches. Some specific concerns which affected Catholic schools were raised. It was of the view that levying rates on their schools would place an unsustainable burden on the schools. Schools that were registered in terms of relevant education legislation ought to be regarded as performing public benefit activities and should be exempted from tax. Therefore, CIE was in support of ISASA's contention that the list in Clause 8 be expanded to include "properties used solely or principally for public benefit activities, as defined by S30 of the Income Tax Act.

Discussion
Mr Carrim (ANC) asked the Department why public benefit organisations were not exempted under the proposed Bill.

Ms Manche (DPLG) replied that some of the definition terms seemed to be misconstrued by the presenters. She pointed out a distinction had to be made between the following terms:
- "Exclusion" meant that a property was immune from property rates
- "Exemption" was when a municipality for its own policy decision took a decision not to assess or rate a certain category of property.
- "Reduction/ Rebates" was when a municipality took a decision that a certain class of property would be assessed but would offer some form of discount or value that property at a lesser value.
- "Grants in aid" for this category of property, the municipalities themselves would fund the running of that category of property.

She argued that the reason why public benefit organisations were not exempted was mainly because the previous exemptions or rebates created some distortions in the market and by that created an artificial market. Hence a policy decision had been taken by the department to remove all the exemptions. Exemptions and rebates would be left to the discretion of local government spheres in consultation with the community. However that decision by the department, did not preclude the municipalities from providing support particularly to those organisations that were in need of support.

Mr Carrim (Chairperson) conceded that there seemed to be a lack of trust between the municipalities and the SACC and growing perception of lack of capacity on the part of the municipality to monitor the implementation of the policy framework consistently. He asked the department and SALGA to respond to those concerns.

SALGA's response was that the real challenge was the extent to which these social partners utilise the existing legislation to form partnerships and reduce the growing tensions. It was also upon the municipalities to develop policies that were suitable and policies that were mutually beneficial to both the municipalities and public benefit organisations like the SACC.

Mr Solo (ANC) was concerned that most of the public benefit organisation owned huge stocks of land and in some cases did not use the land in a developmental sense. Hence the important question was whether the land owned by the public benefit organisations was used for the benefit of the community.

Mr Nobunga (ANC) proposed that there was a need for clarity of what ought to be in the "benefit of the community" as well as the phrase "property used for religious purpose"

Ms Ntombela (ANC) asked whether it was conscionable to apply a blanket approach in the exemption of property used for religious purpose.

Mr Tilton (SACC) correcting what appeared to be a misconception said that there was not a lack of trust between the municipalities and religious institutions. However SACC recognised the pressure on local government to impose rates on certain organisations. Hence there was a need for the establishment of a consistent national policy that would set the framework for the imposition of property rates. He added that the exemption on property belonging to the religious institutions had to be restricted specifically to that category of property where there were houses of worship. In ensuring that exemptions where not granted to the wrong persons, Mr Tilton submitted that the Act should be brought in line with existing legislation like the Income Tax Act which exempts organisation which were not profit generating and were paying little remuneration to their employees.

Mr Carrim (ANC) commended the SACC for its detailed and researched submission but added that it was important to note that there were some religious organisation who were extremely rich. Hence there was a need for the committee to apply its mind on what was happening in other countries and assess whether blanket amnesty for religious institutions was necessary.

Mr Smith (IFP) directing his question to the Catholic Institute of Education asked why it was necessary to exempt public schools because the National government was paying the property rates for such schools for the benefit of municipalities.

Mr Nobunga (ANC) proposed that while the interested organisations were making submissions to be exempted, it was also important to come up with proposals and suggestions as to an alternative source of revenue for the municipalities to deliver on service delivery.

Mr Bennett (ISSA) said that it was in the interest of the national economic policy to exempt all schools from property rates because there were mutuality of benefits between the community and the schools.

South African National Parks submission
SANPArks submitted that given South Africa's developmental priorities, it was impossible to mobilise sufficient funds for the land acquisition programme necessary to achieve South Africa and SANParks' conservation targets through land purchase. Currently SANParks was devising various incentive programme to persuade private owners to allow the incorporation of their land into national parks through contract and chief among those programmes, was exempting the private owners who contracted with the SANParks from rates and taxes. Hence the Bill in its current form was attempting to unilaterally amend the terms of such contracts and that might lead to some serious legal consequences. It was SANParks submission therefore, that it would be proper to disallow the imposition of rates on all land within national and provincial protected areas or all land within national and provincial protected areas excluding those parts of such areas used for commercial or business purposes.

Western Cape Nature Conservative Board submission
The Western Cape Conservative Board argued that a large part of land, which was inadequately conserved, was still in private ownership. Hence the most cost-effective means of conserving important biodiversity sites was by encouraging appropriate land use and management on such private holdings. The Bill in its current form did not adequately encourage and support sustainable land use practices or provincial and national land management objectives. Hence they proposed that there was a need for municipal guidelines which encourage local economic development in collaboration with the finance ministry including guidelines for split or differential rates for Public Private Partnerships which support the local economy and biodiversity.

Botanical Society of South Africa submission
They argued that the imposition of rates would alter land use decisions that could threaten the persistence of nationally important biodiversity as now land owners would be compelled to put pristine land into production to cover rates liabilities. Hence they proposed an amendment to take into account the effect of rates on encouraging conservation of natural resources and sustainable land use as well as taking into account the effect of rates on promoting the conservation of Threatened Ecosystem as listed in the National Environmental Management: Biodiversity Bill of 2003. Hence they supported the contention that rates should not be used to penalise landowners committing land for public benefit in protected areas.

Discussion
Mr Ngubeni (ANC) pointed out that the private persons who were granting land to SANParks on contract were accumulating lots of profits and hence it would be unfair to exempt them from paying property rates. He pointed out that the intention of the Bill was not to impose tax on SANPark but to the business activities within SANPark.

Mr Smith (IFP) needed some clarity with regards to the individuals who were contracting with SANPark.

Mr Magome (SANPark) was of the view that the arguments posited above were flawed because none of the benefits accruing out the land were going to the concession partners. Most of the concession partners were abandoning their rights for the benefit of the State and the only benefit the SANParks could provide in return was to exempt them from property rates.

Mr Ngubeni (ANC) still maintained that the private landowners would be getting much from SANPark if they were to be exempted from property rates. Hence there was a need for more information on the agreements entered into by SANParks with the private landowners before considering exempting them from property rates.

Mr Carrim (Chair) conceded that, when the interested organisations were making submissions, they had to try to balance the interest of the municipalities to deliver with their interests because if the Bill was to exclude or exempt a myriad of organisations, the municipalities would struggle to get enough revenue to deliver on the needs of the community.

Mr Daitx (Western Cape Parks Board) proposed that the best solution would be for the conservation parks to work in partnership with municipalities in uplifting the communities adjacent to the parks.

Ms Manche (DPLG) pointed out that the initial intention was not to exempt conservation parks, however it was realised that there were some parts of the state conservation parks which were used for commercial purposes for example Table Mountain. Hence, it was impossible to exempt such areas. However, some of the clauses were too broad more particularly with regards to national and provincial protected areas.

[The PMG monitor left the meeting at 5pm - the rest of the meeting was not minuted. No further submissions were heard but a general discussion ensued.]

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