APPENDIX 1

"DISCUSSION DOCUMENT ON LAND TAX – 11 OCTOBER 1996,
as published in Government Gazette No. 17 495

1. BACKGROUND

Since the publication of the Third Interim Report of the Commission of Inquiry into certain aspects of the Tax Structure of South Africa (November 1995) which contained an interim report of the Subcommittee on Land Tax, various documents were produced and pieces of draft legislation published which impact directly on the possible introduction of a land tax. The following events and publications need to be mentioned in this regard:

  1. The Commission received numerous written submissions on the possible introduction of a land tax;
  2. The Constitution of the Republic of South Africa Bill 1996 was published in May 1996 and referred to the Constitutional Court for certification in terms of sections 71-73 of the interim Constitution;
  3. In February 1996 the Department of Land Affairs published its Green Paper on South African Land Policy;
  4. Proposed draft legislation aimed at amending the Local Government Transition Act 209 of 1993 was published in July 1996 by the Department of Constitutional Development for public comment; and
    The draft Constitution has been referred back to the Constitutional Assembly for amendment on 6 September 1996.

In the light of these events, documents and the proposed legislation, as well as the Katz Commission’s proposal (par 4.3.1: Katz, 1995) that further investigation be undertaken to ascertain the merits of a land tax in the local sphere of government, the Subcommittee deems it necessary to divulge its current thinking on some of the contentious issues regarding a land tax.

In Chapter 3 of its interim report the Subcommittee recommended that a national land tax should not be implemented in South Africa at this time (Katz, 1995). However, the Subcommittee believed that further research into the possible introduction of a rural land tax in the local sphere was indeed required. The Commission and the Joint Standing Committee on Finance in this regard have accepted the Subcommittee's recommendations. It was welcomed by the Department of Land Affairs (see Green Paper on South African Land Policy 17-18).

2. FRAMEWORK LEGISLATION

2.1 Introduction

The first issue to be addressed in framework legislation is the relevant local government structure(s) to levy a rural land tax. In this regard the following background is pertinent:

The interim Constitution (s 178(2)) and draft final Constitution (s 229) guarantee ‘rates on property’ as a source of revenue for local government. Significantly the draft Constitution (s 228) also explicitly prohibits provinces from levying any "rates on property". From a constitutional point of view, a "rural land tax", as a species of "rates on property", could therefore only seriously be considered as a source of revenue for rural local government. As transitional metropolitan substructures (in metropolitan areas) and transitional local councils (in non-metropolitan areas) are already levying (urban) property rates, the introduction of a rural counterpart should probably only be considered for transitional rural councils (TRuralCs) and/or transitional representative councils (TRepCs). (See Part VA [Rural Local Government] of the Local Government Transition Act 209 of 1993.) All of the above mentioned transitional local government structures function at the primary level. Transitional metropolitan councils (TMCs) and their non-metropolitan counterparts, the district councils, do not currently levy any rates on property.

The Subcommittee is of the opinion that a land tax should be levied at the primary level (i.e. TRuralCs and/or TRepCs) rather than by the district councils, for the following reasons:

    1. Property rates are presently levied at the primary level (transitional metropolitan substructures and TLCs) in the case of metropolitan and non-metropolitan urban local government;
    2. It is vital that a sound structure of local government financing should be established if local government is to be assured its rightful place (par 3.6.4: Katz, 1995);
    3. Primary rural local government structures have no other tax bases to utilise at present and they are dependent on a sustainable source of revenue to ensure at least some fiscal autonomy;
    4. If the tax is levied at primary level, and the benefits of this tax accrues to the local taxpayer community, acceptance and compliance will be higher and administrative costs lower (Chapter 6 of Appendix B: Katz, 1995);
    5. Since primary local government structures may be dependent on this source of revenue, a healthy and growing economic environment within which taxpayers in their constituencies operate, will be in their interest;
    6. If compensating measures (i.e. in the case of drought, emerging and young farmers, hardship cases, etc) are necessary, local government structures are better informed and situated to evaluate their validity and applicability;
    7. Section 229 of the draft Constitution (currently under reconsideration by the Constitutional Assembly) as well as section 178 of the interim Constitution guarantee property rates as a source of revenue for local government; and
    8. The 1995 amendments to the Local Government Transition Act ensure that interest groups are well represented on TRuralCs and TRepCs which should counter mismanagement of land tax revenues.

Chapter 7 of the draft Constitution (dealing with Local Government) and section 229 (dealing with municipal rates and taxes) were referred back to the Constitutional Assembly to be amended in accordance with the Constitutional Principles contained in Schedule 4 of the interim Constitution. However, in light of the court's reasoning and what is contained in these measures, the following features will probably also be present in the final Constitution:

    1. A two-tier local government structure to be established for the whole of the territory of South Africa;
    2. The establishment of primary local government structures for metropolitan, urban and rural areas;
    3. Provisions for framework legislation at national government level to, amongst others, determine appropriate fiscal powers and functions for each category of local government; and
    4. A constitutional guarantee that ‘rates on property’ will remain a source of revenue for local government.

2.2 Reasons for framework legislation

Framework legislation is prescribed by the final Constitution. Section 155(1) reads as follows:

‘National legislation must determine-

    1. The different categories of municipality that may be established;
    2. Appropriate fiscal powers and functions for each category; and
    3. Procedures and criteria for the demarcation of municipal boundaries by an independent authority.’

The framework legislation contained in the proposed draft amendments to the Local Government Transition Act is inadequate in its current form. It is primarily interim measures (for the so-called interim phase of transition) and does not cover all the relevant issues.

2.3 Aspects to be considered in framework legislation

The Subcommittee is of the opinion that the following aspects will have to be considered when drafting framework legislation pertaining to a local land tax:

(i)    Tax base

An important aspect when taxing land is whether the tax is to be levied on the value of unimproved land (site rating), the improved value of land (flat or uniform rating) or separately on land value and the value of improvements (composite rating).

(ii)      Taxpayer

A land tax could be levied on the owner and/or the occupier of land.

(iii)     Methods and frequency of valuation of the tax base

Four methods have been identified by the Commission (Katz, 1995):

The last three methods of valuation are often preferred because they could more readily apply with the ability to pay principle. Frequent revaluations should enhance the equity and acceptability of the tax.

(iv) Tax rate and rate-capping

Any tax has an implicit minimum and maximum rate (Katz, 1995). Rate capping may be necessary as a land tax between 4 and 5 per cent effectively nationalises agricultural land. If too low a rate is levied, the administrative cost will overshadow the fiscal benefits. Various caps for different types of land uses and qualities may be called for.

(v) Tax relief measures

Various tax relief measures could be employed. Experience, however, has shown that exemptions, rebates and tax deferrals should be kept to an absolute minimum.

(vi) Assessment and collection

The capacity to assess and collect the land tax must be in place before its introduction. This is necessary to ensure acceptability and compliance of taxpayers and administrators.

2.4 Proposals of the Subcommittee for framework legislation at primary local sphere

(i) Tax base

All land (i.e. privately owned land, state-owned land and tribal land) within the jurisdiction of TRuralCs and TRepCs must be included in the tax base. The tax base should be limited to surface rights only. In other words, mineral and water rights should be excluded.

Of the three rating systems mentioned, the Subcommittee is of the opinion that flat rating (i.e. taxing the improved value of land) is to be preferred. Taxing improvements (in terms of a flat rating system) can be a disincentive to invest, but this could be countered by applying lower rates, capping and relief measures.

(ii) Taxpayer

It is suggested that the primary responsibility for a land tax should vest in the owner of the land. 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. Present uncertainty concerning ownership and other tenure rights in some areas is a short-term problem.

(iii) Methods and frequency of valuation of the tax base

Although the benefits of the use value methods are recognised by the Subcommittee, the comparable sales method (market value) is preferred, because:

Possible distortions caused by the use of market values of improved land will be addressed if this tax is levied at primary level. (E.g., in Gauteng lower rates could be levied to counter the effect of capitalised non-farm factors.)

It is suggested that revaluations should take place at least every five years. Hardship cases could be accommodated on an ad hoc basis.

(iv) Tax rate and rate-capping

The Subcommittee suggests, albeit tentatively, a 2 per cent maximum tax rate for all land in all jurisdictions. Without any empirical evidence to support the proposed 2 per cent cap on the land tax rate for all land, submissions on this issue will be extremely beneficial in the Subcommittee’s future deliberations and research in this regard. It was argued that the cap should be substantially lower than a confiscatory 4 per cent, but somewhat higher than 1 per cent to still raise sufficient revenue.

When considering an applicable tax rate, the relation between the land tax and other local taxes (e.g. RSC levies) will have to be considered. Underutilisation of a viable tax base may negatively impact on a local government's claim for grant assistance.

(v) Tax relief measures

No exemptions should be made. The relevant local taxing authority is best positioned to decide on rebates and tax deferrals. These measures could be considered in specific circumstances that may differ from area to area (i.e. drought, young and emerging farmers, land reform programmes, establishment of long-term crops, etc).

(vi) Assessment and collection

If the capacity to assess and collect a land tax does not exist in a particular jurisdiction in the short term, neighbouring TLCs could perform assessments and/or collection).

The tax must be an annual tax, although, should the capacity exist, it could be collected at shorter intervals (e.g. monthly).

3. SUBMISSIONS

In order to facilitate the drafting of framework legislation, the Subcommittee will welcome public submissions on especially the following issues:

Apart from the framework legislation, the possible relationship between a land tax and other taxes (e.g. RSC levies) are of particular concern to the Subcommittee. Therefore, submissions on this issue will also be welcomed."

Contents    Foreword    Chapter 1   Chapter 2    Chapter 3     Chapter 4   Appendix   Home