Chapter 4    RECOMMENDATIONS

4.1    Introduction

During the course of its investigation, the Subcommittee became aware that there are two areas of uncertainty that will influence any actions taken by the authorities with respect to a tax on rural land in South Africa. These are the capacity of the authorities to implement such a tax, and the impact that the tax will have on the citizens of this country. These two issues form a vital part of the assessment of recommendations for the implementation of a rural land tax in terms of the principles of an efficient and coherent tax system, as was argued in paragraph 29 above. In this Chapter, these two issues are discussed against the background of the findings of the research that was conducted by the Subcommittee. This is followed by our recommendations for further action.

4.2    Tax principles

The Subcommittee has evaluated its research findings in terms of underlying principles of an efficient and coherent tax system. In this regard, the Subcommittee has concentrated on the efficacy of a rural land tax and on the ability of the different levels of government to implement such tax. The efficiency and equity of the tax should be measured against its potential revenue yield, the distribution of the tax burden and on the microeconomic effects of the tax.

The Subcommittee is aware of the fact that there are many ways that local service provision might be funded and where the objectives of devolution of tax and local control over service provision funded by such taxes can be achieved. The Subcommittee recognises the importance of empowering lower levels of government through the transfer of own revenue sources.

The Constitution of the Republic of South Africa Act grants municipalities the right to levy rural land taxes. In the course of its deliberations, the Subcommittee considered both the relative advantages and disadvantages of a rural land tax but far more significantly the mechanisms for its efficient and equitable implementation. Whilst acknowledging that a rural land tax may have certain social advantages like encouraging the economic use of land because of the increased holding costs thereof, and be supportive of land reform, the Subcommittee concluded that appropriate measures, such as a rebates system, would be required to accommodate the productive use of land.

4.3    The capacity to implement a rural land tax

In its Interim Report, the Subcommittee recommended against the use of a rural land tax in the national sphere of government, either as a means of raising revenue or as an instrument of the land reform programme. The Government accepted this recommendation. However, the Subcommittee was unable conclusively to recommend for or against the use of such an instrument in the provincial or local sphere, although it did express a preference for its use in the local sphere in the event that the tax was found to be of benefit. Subsequently, however, the adoption of the Constitution has provided some clarification on this issue: it ruled out the provincial sphere, and explicitly empowered municipalities to raise taxes on property.

Notwithstanding this clarification, however, there is still uncertainty surrounding the final shape of local government in South Africa. During the course of its research, the Subcommittee came to realise that decisions on the final shape of local authorities matter to their ability and willingness to implement such a tax. To complicate matters further, the Subcommittee is aware that legislation passed in the national sphere of government will probably allow the provinces some discretion in deciding on what kind of rural municipal structures they eventually adopt.

An added problem is that, while much progress has been made in ordering the relationship between the central government and the provinces in the field of management of relations with municipalities, there is less certainty regarding the other two legs of this relationship. It appears, for example, that the relations between provinces and municipalities have not developed much beyond those ruling under the previous dispensation. This means that, in some provinces, the relationship works according to as many as four different sets of rules. Further, there does not seem to have been much progress in regularising the relationship between the national government and municipalities, especially in respect of their fiscal relationship.

These uncertainties matter in assessing the capacity that exists within municipalities to take on new responsibilities such as the implementation of a rural land tax. For example, in its Media Statement of October 1996, the Subcommittee intimated that it preferred that the tax should be raised in the primary tier of local government, rather than at the secondary tier. However, the research of the Subcommittee, as reported in Chapter Three above, shows that primary rural municipalities generally do not have the capacity for this task. Furthermore, it is not even clear whether primary rural municipalities will exist in the future, while even in the transition phase large parts of the country do not have them. Lastly, the nature of the relationship between provinces and rural municipalities and between the national government and rural municipalities will also determine whether the latter have the capacity to be charged with this responsibility. The more support rural municipalities receive from the other two spheres, the greater their capacity to undertake such tasks.

With this in mind, it is necessary that the Subcommittee first turns its attention to recommendations for further action in the local sphere of government. However, the Subcommittee is aware that decisions in the local sphere regarding the implementation of a land tax (including the decision not to implement it) cannot be successful unless they take place within a national framework. Therefore, it will follow these recommendations for local action with recommendations for further action in the national and provincial sphere regarding framework legislation.

4.4.    The impact of a rural land tax

The decisions taken by a municipality regarding a rural land tax (within national framework legislation) will have consequences for the municipality itself, and for the community that it serves. The purpose of the research project assigned by the Subcommittee was, inter alia, to assess these consequences, which flow from both the fact of the introduction of the tax, and from the specific design of the tax. In this respect, the Subcommittee has investigated the consequences of decisions around:

• The definition of the tax base;
• The optimal rating system;
• The taxpayer;
• The method and frequency of valuation;
• The tax rate and the desirability of rate-capping;
• Tax relief measures;
• Measures of tax assessment and collection; and
• The relationship with other taxes.

The issues identified here, must also become the major elements on which national framework legislation must focus in order to establish an efficient and coherent tax regime. In the following sections, therefore, recommendations are made for further action in the municipal sphere under each of these headings. These will be followed by recommendations for action in the national and provincial spheres. As the first set of recommendations is addressed to municipalities, the discussion starts with a consideration of the appropriate tax authority.

4.5    The tax authority

In its Media Statement No. 15 (see Appendix 1), the Subcommittee argued that the most appropriate tax authority for a rural land tax would be primary local structures. However, the research results show clearly that this is not feasible in the near term, even though the absence of implementation capacity and an own revenue base could be compensated for by arrangements such as arranging for the function to be executed on an agency basis or fiscal transfers, etc. Further, it is not yet clear that primary rural municipalities will remain part of the Constitutional dispensation in the country.

For this reason the Subcommittee recommends that:

1. The authorities responsible for the implementation of a rural land tax should be the DCs throughout the country, unless a DC itself devolves the function to a primary municipality;
2. The purpose of such a rural land tax should in all cases be to provide additional services to the communities within the area of jurisdiction of the DC and with a proportion of the benefits being allocated specifically to rural dwellers;
3. The authority so conferred should also include the authority not to introduce such a rural land tax. However, in this instance the FFC is advised not to recommend compensatory transfer payments to authorities who have not implemented a rural land tax;

In this regard the Subcommittee has noted with concern the practice in the Northern Province, where the provincial government has assumed the authority to retain the property taxes raised in the towns in former homeland areas. The Subcommittee wishes to caution against an extension of this practice to the levying of a rural land tax.

4.6    The definition of the tax base

In its Media Statement No. 15, the Subcommittee pointed out that decisions would have to be made regarding which land (property) should be included in the tax base, and which rating system should be used. With respect to these issues, the Subcommittee deliberated on a number of questions, namely, which land should be included, whether mineral and water rights should be included; and what rating system would best serve the needs of the community. The following considerations were taken into account:

• The Subcommittee could not find any reason why privately owned or state land or any sub-category of these should be excluded from the definition of the tax base, and is in this respect in agreement with the majority of those who submitted written and oral comments on this issue. With respect to tribal land, the Subcommittee argued that, while there are many practical problems with the introduction of a land tax in these areas, there is no reason in principle why this land should be excluded from the definition of the tax base. In the longer term the different laws introduced by the Department of Land Affairs that aim to give legal recognition to less formal land rights will narrow the legal difference between this category of land rights and privately-owned rights. Therefore, the disabilities often associated with these forms of land holding, such as lack of transferability and its use as collateral, will weaken over time;
• However, the Subcommittee also considered the many problems associated with the taxation of such land, as is evident from the results of the research undertaken on its behalf. These include the difficulties that will be encountered in surveying and registering such land, the weak capacity of most municipalities in these areas, and the absence of most local government services, etc. While many of the comments received by the Subcommittee did not favour special treatment for this category of land, the Subcommittee recognised the severity of these practical difficulties;
• The Subcommittee also addressed the vehement opposition to a tax on rural land expressed by organised agriculture, the mining industry and the hospitality industry. In this respect, the Subcommittee is of the opinion that such opinions are best heard at the DC level, where considerations of the level of services that are to be provided from the proceeds of the tax can be fully accounted for;
• With regard to mineral rights, the Subcommittee took the view that, since mineral rights are excluded from the tax base in urban areas, and since policy on mineral rights has not yet been finalised, these could be excluded from the tax base;
• With regard to water rights the Water Act has been changed so as to enable land rights to be severed from water rights, and for a system of water licences to be introduced. Access to such licenses obviously affects the use value of rural land; and
• With respect to the rating system, the Subcommittee is aware that urban municipalities generally have an option (and tend to adhere to their choices in this regard) between at least two of the following tax bases: site rating, flat rating or composite rating. The result is that different systems can be found in contiguous areas without causing insurmountable problems.

Taking these arguments into consideration, the Subcommittee recommends that:

4. Because use values are recommended as the proper basis for valuation (see recommendation No. 11), the tax base should in all cases be defined as surface rights in all rural land including water licences but excluding mineral rights, within the area of jurisdiction of the DC, including privately-owned land, state land and land held under other forms of tenure. This definition should be adhered to by all DCs;
5. DCs should be allowed the discretion to exempt tribal land from the liability to be taxed for a fixed period of, say, five to ten years. In those cases where there may not be a clear basis for levying a rural land tax in areas under customary law, DCs should work urgently in conjunction with the Department of Land Affairs to correct the situation;
6. However, to allay the fear that such exemptions will tempt DCs to increase tax rates on commercial farm land, they should only be allowed to exercise this discretion (see No. 5) if they receive compensatory grants from the national or provincial spheres of government;
7. All DCs should proceed forthwith, in collaboration with the offices of the Surveyor General and the Registrar of Deeds, to ensure that all rural land within their areas of jurisdiction is properly surveyed and all tenure rights ascertained, whether or not they intend to introduce a rural land tax. Registered owners of the land should at least be responsible for registering the outer perimeters of the land over which ownership is asserted, and for the costs attached thereto;

4.7.    The taxpayer

During its deliberations, the Subcommittee has not found any reason to change its position on this issue. Therefore, the Subcommittee recommends that:

8. The primary responsibility for paying the rural land tax should vest in the owner of the land;
9. In the instance of limited real rights (e.g. usufruct, servitudes, etc) the liability should be shared between the owner of the bare dominium and the holder of the limited right;

4.8    The method and frequency of valuation

The Subcommittee has spent considerable time in evaluating the merits and demerits of the different methods of valuation, and reported extensively on the various options in its Interim Report. Subsequent deliberations have been based on the submissions made to the Subcommittee and the results of the research that was conducted during the course of this investigation. The Subcommittee is of the opinion that, among the many issues that have to be accounted for, there are two that are key which will determine what method is optimal:

• Because agriculture is the key economic sector in the rural areas, the needs of this sector should be paramount. Here the research conducted on behalf of the Subcommittee has shown a clear bias in favour of use value. Non-farm factors, especially in areas close to urban concentrations, cause a discrepancy between the agricultural value of land and the market value. Levying a land tax on market values will have a disproportionately disruptive effect on the sector. In addition, there is a long tradition of valuation according to use value methods in agriculture ⁽¹⁾, and economists have developed appropriate tools to expedite these methods; and
• On the other hand, it is fair to argue that the existing capacity within municipalities is biased towards market valuation methods, as these have traditionally been used in urban areas. Property valuers other than those involved in agriculture have more experience with these methods. Furthermore, not all land in rural areas is used for agriculture.

These arguments lead to a paradox: in the absence of firm guidelines, there will be a bias towards using market valuations in areas closer to existing urban concentrations, as this has been the practice in these areas. Yet, it is precisely under these circumstances that market valuations result in the greatest distortions in the agricultural sector when compared to use values at the same tax rates. Nevertheless, the degree of distortion is less the lower the tax rate. As market values result in a higher assessment of the value of land under such circumstances (i.e. when non-farm factors have their greatest influence), the rate at which the tax is levied can be much lower.

The Subcommittee has also considered alternative instruments for assessing the use value of agricultural land. The research commissioned by the Subcommittee has shown that in 30 states in the USA, and in Chile, for example, there are prescriptions for public participation in the process that succeed in making the values arrived at transparent, and therefore more legitimate. While these processes result in higher administrative costs, they reduce the number (and expense) of the disputes that inevitably arise as a result of assessments. These participative approaches are often accompanied by mass valuation techniques. An example of such techniques was used in the research process on which the results in Chapter Two are based. The purpose of these techniques is to lower the cost of assessment, and to increase their accuracy.

Finally, there can be no prescription regarding the frequency of valuation. Objectively, the more frequent the valuation, the more equitable and efficient the tax will be when measured in terms of its impact. However, more frequent valuations increase the cost of administering the tax. In practice, land prices in agriculture tend to be more stable than in urban areas, so that valuations can be less frequent than in the case of urban valuations.

Taking these arguments into consideration, the Subcommittee recommends that:

10. All DCs should adhere to section 10G(6) of the Local Government Transition Act, No. 209 of 1993 and prepare a valuation roll that includes – as a minimum - the unimproved value of all rural land within their areas of jurisdiction, whether or not they intend introducing a rural land tax. Central Government should finance the outlays for the initial valuations;
11. DCs should assess land by use value methods, as the preferred means of assessing the value of such land;
12. DCs should explore the merits, under their particular circumstances, of innovative methods of assessing the use value of agricultural land, including public participation processes, mathematical programming algorithms, etc.;
13. DCs should plan the frequency of valuations of rural land within a limit of 5 years, with the view to optimising between tax efficiency and equity on the one hand, and administrative cost on the other. In the event that new legislation or the implementation thereof should materially effect existing valuations, procedures should be in place to have effected properties re-evaluated;

4.9    Tax relief measures

The most common tax relief measures include exemptions from, rebates off and deferrals of the tax liability. All of these measures are used in urban areas in South Africa. These relief measures are all conventionally used to enhance the fairness of the tax. While such measures have the potential to increase the cost of administering the tax, some additional costs can be avoided if the taxpayers perceive that the system is fairer.

Furthermore, these instruments can be used to pursue a range of policy objectives. For example, in many countries that tax agricultural land, a rebate is granted as a means of protecting the agricultural character of the area, and deferrals are used in times of stress created by the weather (e.g. droughts and floods). A further possibility in the South African circumstances would be to grant an exemption from the tax liability for all tribal land until such time that the land has been surveyed and assessed, and the new laws providing legal protection to the owners (and/or holders of other enforceable tenure rights) have come into effect.

Should the recommendation to treat the tax as a provisional tax payment for income tax purposes be followed, tax relief measures can be limited to the bare minimum, which will make for much less complex legislation.

However, it should be acknowledged that there are large numbers of persons enjoying land use, e.g. in the communal land areas, and who are not required to be included in the tax net. These persons should be accommodated by some form of a de minimis exemption. The intention is that poor people who cannot afford such a cash outlay or who have no means of recovering the land tax through the income tax system, should be exempted.

Taking these arguments into consideration, the Subcommittee recommends that:

14. DCs should seriously consider following transparent processes that encourage public participation when deciding on the tax rate (as recommended in section 4.8 above), and on tax relief measures in rural areas;
15. In considering this possibility, DCs should be led by a consideration of the costs and benefits of such processes, i.e. by weighing the additional costs of a longer process against the benefits that will flow from a more transparent, and hence more legitimate, process;
16. DCs should ensure that their policy on the kind of relief measures they are prepared to consider, and the extent of such relief, is well known among the community of tax payers before the need arises to make such concessions;
17. DCs should, as a matter of policy, exempt tribal land from a rural land tax until such time as the land is properly surveyed and assessed and those using such land are afforded sufficient legal protection. However, the qualification mentioned in recommendation 6 above should apply;
18. A rural land tax should only be payable on land which has a use value in excess of an amount to be determined by the Minister of Finance acting in consultation with the Ministers of Agriculture and Constitutional Development or by persons who enjoy the use of land and have a gross income as defined in the Income Tax Act, No. 58 of 1962 in excess of an amount to be determined by the Minister of Finance acting in consultation with the Ministers of Agriculture and Constitutional Development;

4.10    The tax rate and the desirability of rate-capping

The Subcommittee is of the view that the tax rates should be determined by individual municipalities subject to approval from the Department of Finance, and that the tax be treated as a provisional tax payment for income tax purposes. If this recommendation is followed it is not necessary to make any recommendations on tax rates or rate-capping.

4.11    The relationship with other taxes

The Subcommittee has argued that it does not expect RSC levies to be abolished (paragraph 193), and that transfer payments between the national and local spheres of government must be rational, predictable and accountable (paragraph 114). In dealing with the relationship with income taxes, four alternatives can be considered.

First, the rural land tax can be treated as an additional tax. Should this be implemented, the following will apply:

• It will be difficult to measure the total tax burden;

• Resistance can be expected from taxpayers, with the resultant problems of compliance in implementing and maintaining the system;

• Comprehensive tax relief measures will have to be formulated, which will add considerably to the complexity of the legislation; and

• It will result in the biggest distortions in the land market (see paragraphs 48 and 54). As a result, there will be a significant impact on the management of short term liabilities of especially emerging farmers (see paragraph 59), and on the surrounding rural economy (see paragraph 65).

Second, the tax can be treated as tax deductible for income tax purposes. The results will be that a net tax cost of up to 55 per cent of the land tax payable will arise. While the impact on farmers and the rural economy will be less than in the first case, these disadvantages will still be present.

Third, the tax can be treated as a set-off against assessed income tax. The result is that the land tax will become a minimum tax, and will be even less distortionary than the previous two alternatives. However, it will still require comprehensive relief measures, and, therefore, complex legislation.

Fourth, the tax can be treated as a provisional tax payment for income tax purposes. This will have the following consequences:

• It will be possible for the taxpayer to claw back the land tax paid if there is not sufficient assessed income tax in her/his particular case;

• The land owner will have to be registered for income tax purposes to benefit from any potential claw back. Needless to say, this will add significantly to the narrowing of the tax compliance gap in respect of the income tax;

• The need for tax relief measures will fall away;

• The land tax will have a negligible effect on land prices, the short term finance requirements of especially emerging farmers and the surrounding rural economies;

• The co-operation of existing and emerging farmers and their representative organisations in the design, implementation and maintenance of the tax can be expected; and

• Under this alternative it will be necessary for the local authority to obtain authorisation from the Department of Finance before a land tax can be implemented, to ensure that the necessary administrative capacity exists for proper implementation of the tax, in addition to approval of the tax rate.

4.12    Recommendations to the national government

The Subcommittee has thus far addressed its recommendations to the DCs, as it is in this sphere that a rural land tax should be decided upon, both in respect of whether the tax should be levied, and if so the manner in which it will be implemented. However, the Subcommittee believes that it is vital that framework legislation be passed in the national sphere to ensure the orderly introduction of the tax, and to ensure that it fits into national fiscal policy, including the intergovernmental fiscal framework.

Yet the Subcommittee recommends that the DCs be charged with this responsibility not necessarily because they are the ideal institutional vehicle, but because of the lack of an alternative. The Subcommittee has, during the course of its investigation, constantly been frustrated by the lack of progress in regularising local government matters. During the course of the research carried out on its behalf, the high level of frustration of many of the representatives of the DCs that participated was also evident.

The result is seen in outcomes that may suit some provincial or local objective, but that frustrate national policy. For example, there are DCs that cover a larger surface area than Gauteng: a number of them are sparsely populated, and a number very densely populated. This cannot be conducive to efficient rural development policy and planning no matter what good reason provinces may have for their establishment. Also, many DCs have boundaries that cut across magisterial borders, making detailed demographic analyses all but impossible. Above all, the Subcommittee has become aware of the uncertainty created by the lack of a coherent fiscal framework to order fiscal relations between the national government and municipalities, and between provincial governments and municipalities.

For these reasons the Subcommittee recommends that national framework legislation be passed that will provide a flexible, empowering environment within which rural municipalities can fulfil their constitutional obligations regarding development within the communities they represent. More specifically, the framework legislation should encompass the following:

19. A DC should not implement the tax unless it decides that primary rural municipalities in its area of jurisdiction do not have the capacity to do so. Framework legislation should cover the conditions under which such a transfer of authority can take place, and a right of appeal (in terms of Section 41 of the Constitution) by the primary rural municipality to defer such a delegation or to precipitate it where a DC does not want to effect the transfer, should exist;
20. The definition of all surface rights to land in rural areas as part of the tax base, including privately held land, state land and tribal land;
21. The definition of the taxpayer as the owner of the land, where the owner is defined in terms of existing private property rights as well as in terms of the legal recognition granted to different forms of tenure;
22. A provision for the assessment of agricultural land according to its use value and not market value, and for a choice of assessment methods for other rural land;
23. A provision for the reassessment of properties at intervals of no longer than 5 years;
24. The provision of guidelines regarding the types of tax relief that are allowable, and the conditions under which such measures may be implemented, namely prescriptions for more transparent and participative processes;
25. A cap on the tax rate only by stating the requirements of the rural land tax (e.g. that it allows economic activities to continue unhindered as far as possible; that it allows rural municipalities to play the role envisaged for them in the Constitution) and not by stating any specific maximum tax rate;
26. A stipulation that the tax be treated as a provisional tax in terms of the Fourth Schedule to the Income Tax Act, No. 58 of 1962;
27. In order to enhance the efficiency of the tax regime, provision for penalties in cases of non-registration and non-payment;
28. National government should ensure that the framework for fiscal transfers between itself and rural municipalities and between the provincial governments and rural municipalities does not provide incentives to rural municipalities to introduce the tax in a manner that is disruptive of ordinary business decisions. This includes provision for compensatory grants in cases where tribal land is not taxed as an interim measure;
29. A municipality must only be allowed to implement a rural land tax upon presenting to the Department of Finance a satisfactory business plan that, inter alia, reflects service provision to rural communities and satisfying the Department of Finance that it has the necessary capacity to administer the land tax and after reaching agreement with the Department of Finance regarding the tax rate.

4.13    Recommendations to the provincial governments

The Subcommittee is aware that the provinces may pass legislation and generally make policy with regard to municipal matters, including their own framework legislation to order the levying of a rural land tax. However, the Subcommittee believes that it is more important that the provinces first give their attention to a number of critical issues to regularise local government matters.

During the course of its research the Subcommittee noted that in some provinces, especially where steps were supposed to be taken to consolidate multiple former authorities, a myriad of laws still govern municipal issues. This creates uncertainty and, in most cases, perpetuates bad policy, weak legislation and a lack of implementation capacity. The example of the Northern Province, where the provincial government is, in the view of the Subcommittee, plainly acting unconstitutionally by levying urban property taxes, is only the most visible case. In this and other provinces municipalities are faced with the dilemma of having to manage their affairs under different, and often conflicting, legislation.

The Subcommittee is of the opinion that this lack of progress in consolidating legislation is merely a symptom of a lack of progress in providing a sound and coherent provincial policy framework within which local governments can manage their affairs. As noted above, the provinces can only partly be blamed for this state of affairs. The practical result is that, in the case of some of the provinces, there has been little progress in formulating and implementing policy towards matters such as the size of DCs, the capacity of primary rural municipalities and the proper fiscal relationship between the provinces and local governments.

In this respect, the Subcommittee recommends that:

30. Provinces should pay immediate attention to consolidating the different types of legislation that order rural local government matters within their area of jurisdiction;
31. Provinces should provide a policy and legislative framework to order the economic, physical and population size of DCs in order to align these with the needs of the development task that DCs have to fulfil;
32. The implementation of any recommendation accepted by the Government should specifically be subjected to ongoing review, monitoring and evaluation by the respective tax policy analysis divisions in the Department of Finance and the South African Revenue Service; and

It should be noted that the recommendations proposed form a coherent whole and any selective acceptance of recommendations could impact adversely on the acceptability and equity of the recommended land tax system.

The successful implementation of a land tax hinges on public awareness of its full implications, benefits and the rights of taxpayers.

In this respect, the Subcommittee recommends that:

33. These recommendations, upon acceptance by Government, should be published as widely as possible and in a format that is user friendly, simplified and accessible to the affected persons.

(1)  In the United States, use values are used to assess agricultural land for the purposes of levying land taxes in 48 of the states.

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