1. 1 PROPERTY RATES BILL: KEY CONCEPTS AND dplg RESPONSE TO QUESTIONS POSED BY PORTFOLIO COMMITTEE ON PROVINCIAL AND LOCAL GOVERNMENT June 4, 2003

2. 2 KEY CONCEPTS  Property Rates are the product of:  A base; and  A rate  Once the base is defined, the value of property is determined using:  Basis or method of valuation

3. 3 KEY CONCEPTS  Rates Base:  What the rate is levied on  Two bases:  Land Only  Land and Improvements

4. 4 KEY CONCEPTS  Rate:  Cent amount in the Rand applied to the value of property located in the municipality  Three types of rate on land and improvements (improved value):  Uniform rate: Same rate on land and improvements  Variable rate: Different rate on land and improvements  Flat rate: Fixed rate below a prescribed valuation band  Rate on land only

5. 5 KEY CONCEPTS  Basis or Method of Valuation:  Market value  Annual value  Depreciated replacement cost of buildings (municipal value)  Use value (degree of productivity)

6. 6 QUESTIONS  With regard to the base:  Why have we chosen a uniform base?  Why is this uniform base land and improvements and not land only?

7. 7 ANSWERS  Reasons for uniform base:  Determine fiscal capacity of municipalities  Enable national monitoring and prescription  Achieve equitable treatment of citizens  Easier for valuation profession  Easier for people to understand and engage in rates policy consultation process

8. 8 ANSWERS  Choice of land and improvements as base:  Easier to assess than land only  More sales data available  Broader rates base  Politically more acceptable  Lower nominal rate needed to generate same revenue

9. 9 QUESTION  With regard to the rate:  Why mandate a uniform rate (same rate on land and improvements) and not a variable rate

10. 10 ANSWER  Reasons for uniform rate system:  Determine fiscal capacity of municipalities  Enable national monitoring and prescription  Achieve equitable treatment of citizens  Easier for people to understand and engage in rates policy consultation process

11. 11 ANSWER (cont.)  Reasons for uniform rate system:  If we allow for variable rate, some municipalities might opt for zero rating improvements –  Tantamount to the base being land only in some municipalities and land and improvements in others i.e. a non-uniform base that we have already argued against

12. 12 QUESTION  Why use market value instead of annual rental value as method of valuation?

13. 13 ANSWER  Reasons for using market value:  Difficulty in estimating annual value  Horizontal equity (ratepayers with properties of similar value should pay a similar amount) better under market value  Vertical equity (taxpayers with properties of different value should pay different amounts) better under market value

14. 14 ANSWER (cont.)  Reasons for using market value:  The common practice in South Africa is to use market value as valuation method  Natal ordinance is only one that allows different valuation method:  Land valued using market value  Improvements valued using depreciated replacement cost of buildings – causes inequities whereby poor pay proportionately more than the rich.

15. 15 QUESTION  Do we have any studies as to whether or not use of land only or land and improvements as the base by different municipalities has led to a more or less desirable use of property in South Africa?

16. 16 ANSWER  To our knowledge, no studies done to establish whether or not different bases, rating systems or valuation methods have led to a more or less desirable use of land in South Africa  However, international experts have said that evidence on benefits of taxing land only versus taxing land and improvements is inconclusive

17. 17 THE END THANK YOU