Simpiwe Seti finds that the implementation of the Property Rates Act has started but is unlikely to be finalised for some time

The Municipal Property Rates Act, No. 6 of 2004 was promulgated on 11 May 2004. On 2 July 2005 the Act came into operation and immediately repealed Provincial Ordinances. For the 2005/2006 financial year, no municipality could have been sufficiently legally and procedurally prepared to implement the Act and national government has specified a four-year implementation period ending on 1 July 2009. Individual municipalities must now assess their own state of readiness and determine when, within the four-year period, they will fully implement the Act.

The Municipal Property Rates Act is aimed at, inter alia:

• regulating the power of municipalities to impose rates on property
• providing for exclusion of certain properties from rating
• providing for a fair and transparent system of exemptions, reductions and rebates
• providing for fair and equitable valuation methods of properties

On the whole, the Act aims to make the application of rating system more uniform throughout the country and to expand the rates base. It also requires local municipalities to commit to a clear and transparent rates policy.

Key provisions of the Act are as follows:

• Every municipality must have a rates policy. Without a rates policy the municipality will not be able to grant any rebates, exemptions or reductions in rates, as these have to be granted in terms of the rates policy.
• Transparency and public participation is required. Before a rates policy can be adopted, there must first be a process of community participation. The principle of transparency is also evident within the provision related to valuation rolls, their inspection and the right to object thereto.
• Municipalities may recover rates from the occupant, the tenant or the estate agent, notwithstanding the fact that the primary duty to pay rates lies with the owner of the property.
• Transitional arrangements are provided for, thereby allowing the municipalities to make the necessary changes and arrangements to existing practice in phasing in the Act.

Public understanding of the concept of “rates” has always been murky and helped little by media reports that consistently fail to distinguish between rates and service charges. Rates are basically a tax on the value of immovable property and are largely unrelated to the level of service consumption by a particular household. Income from rates is normally used to fund general operations and services such as infrastructure maintenance, street lighting, storm water drainage facilities, parks and recreational facilities. Contrary to service charges, rates are directed to services that are collectively used and where individual consumption of the service is difficult to measure or charge to a particular consumer or household, for instance:

• installing and maintaining streets, roads, sidewalks, lighting and storm drainage facilities
• building and operating clinics, parks, recreational facilities and cemeteries
• funding municipal administration, such as computer equipment and stationery
• costs of governance, such as council and community meetings aimed at facilitating community participation on issues of IDPs and Budgets

Rates income constitutes a large portion of municipal own revenue, which was estimated at 20% of national municipal income in 2005 according to Andre Olivier of Organisation Development Africa. In 1998, widely quoted figures suggested that rates constituted about 60% of municipal revenue. This decrease in the relative importance of rates probably stems from the growth rate of other revenue sources principally grants from national government. Comparative revenue figures by ODA indicate that increases in rates income (about R1.8bn) from 2002/2003 to 2003/2004 are less than increases in user charges (R3bn) and “other” revenue sources over the same period.

Publication of the Municipal Property Rates Bill for public comment sparked an intense debate in party circles and within the legal / real estate sector but has, arguably, generated little coherent discussion within civil society as a whole. The most vociferous political critique is that the Property Rates Act is a thinly disguised attempt by the government  to implement a hidden agenda of indirect redistribution of wealth and land. Some have even suggested that it is a hidden wealth tax or an attempt at forced removals through property tax . Ratepayer concerns have been sparked mainly by the provision that rates will now be based on the market value of property. Property prices have increased dramatically over the last few years fuelling fears that escalating rates bills would put pressure on ordinary homeowners to give up their main investment.

A significant new category of property that becomes rateable is agricultural land. Farmers’ resistance to being included in the rates net is based on the argument that they are already taxed through other levies such as district municipal levies and that many farms receive minimal municipal services like water, sanitation and power. Farmers also argue that agriculture is a low profit sector and, therefore, a land tax might be a disincentive to emerging farmers by reducing their potential net income. The Act appears to have made some concessions to these concerns in that, with respect to agricultural property, it requires that a municipal rates policy must take into account:

• the extent of services provided by the municipality in respect of such properties
• the contribution of agriculture to the local economy
• the contribution of agriculture to the social and economic welfare of farm workers
• the extent to which agriculture assists in meeting the service delivery and development obligations of the municipality

Actually factoring these issues into the municipal valuation process and the determination of the rate could pose a significant challenge to municipal capacity, and might draw the municipality into highly charged negotiations with the local farming community .

Another objection to the bill was that the implications for rural dwellers, especially in respect of areas controlled by traditional leaders were not clear. The Act, in fact, makes no mention of property within the jurisdiction of traditional authority. However, a provision does exist whereby the municipality may potentially avoid rating this category of property:  “The Minister may fully or partially exempt a municipality from the obligation to value properties if the municipality can demonstrate that the valuation of those properties is too onerous for it, given its financial and administrative capacity”.

Unless there is an intention to levy rates there is no mandatory requirement for “properties in respect of which it is impossible or unreasonably difficult to establish a market value because of legally insecure tenure resulting from past racially discriminatory laws or practices”. Clearly this applies to properties commonly found in rural areas, in particular, former homeland and communal areas .

Protection for vulnerable sectors of the community is provided in the requirement that a rates policy must take into account the effect of rates on the poor and on public benefit organisations. Each municipality is given the right to exempt or to give a rebate or reduction to a specific category of property owners. Qualifying categories include indigent households, owners dependent on social grants or pensions, those owners who are temporarily without an income etc. It is up to the municipality to decide how to apply these provisions. Further exclusions may apply in respect of particular types of property. Section 15 (3)(b)(ii) lists these as:

• the first 30% of the market value of public service infrastructure
• protected areas (conservation)
• land reform beneficiaries (for 10 years provided property does not change ownership)
• the first R15 000 of the value of residential property
• religious property

Clearly the full implementation of the Property Rates Act requires a number of preparatory steps:

• Key steps in implementing the Act
• Determination of a date of valuation
• Appointment of a valuer of a municipality where none exists
• Development of a draft rates policy and its approval by council
• Commencement of a general valuation
• Submission of certified valuation roll to the municipal manager
• Public notice for inspection of a valuation roll
• Tabling of a draft budget before council
• Approval by council of by-laws to give effect to rates policy
• Implementation of a valuation roll and rates policy together with the budget of the municipality

Source: Department of Provincial and Local Government

Some municipalities have already begun this process. Ethekwini Metro, for example, has indicated that they already have a rates policy in place that is partially consistent with the Act. Buffalo City local municipality currently operates in terms of old legislation, but plans to have a rates policy in place for the 2007/2008 financial year. The City of Johannesburg is currently in the process of developing a rates policy. The main task is the valuation of properties which will be technically challenging and expensive, apart from the highly charged political / legal issues that are invariably generated. Progress appears to be uneven. Ethekwini reports that they have about 250 data collectors who are busy collecting data to assist with valuation of properties in terms of the Act. The City of Johannesburg currently uses its own property valuers and property valuations commenced about 2 to 3 years ago and is due for completion in July 2007.

Municipalities face many daunting tasks in implementing the Act. Buffalo City has highlighted the scarcity of registered valuers and the likelihood of objections to valuations, which result in lengthy court cases, as their main challenges. The City of Johannesburg has identified changing from rating on the value of land only to include improvements on the land, as their main concern. 

Assistance from national government with implementation of the Act appears to be modest. Apart from Department of Provincial and Local Government workshops, the usual guidelines and a commitment to providing a format for the Rates Policy, municipalities appear to be largely on their own.

References
1 Cluver Markotter Attorneys (2004) New basis for Property Tax: The Municipal Property Rates Act
2 DPLG Municipal Property Rates Act: Basic Information for Ratepayers
3 Hollands, G. Getting to grips with the Property Rates Act. LG Transformer, Oct/Nov 2004
4 Ratiba, M. (2001) Property Rates Bill: What are the implications for the homeowners? Ratiba Incorporated Attorneys
5 Cluver Markotter Attorneys (2004) New basis for Property Tax: The Municipal Property Rates Act
6 Hollands, G. Getting to grips with the Property Rates Act. LG Transformer, Oct/Nov 2004
7 Section 30 (2) (b), Municipal Property Rates Act, no 6 of 2004
8 DPLG Key Steps for the Implementation of the Act 17 October to 30 November 2005

The Local Government Transformer, Vol. 12 No. 4, August/September 2006