Submission to the Portfolio Committee for Provincial and Local Government on The Property Rates Bill 15 th May 2003

Focus of Presentation  Who is Forestry South Africa?  Importance of the Forestry Industry  Where is the Industry coming from?  Major Concerns  Recommendations

Who is Forestry South Africa?  FSA is an Association representing the interests of all timber growers in South Africa.  Main roles:  Promotion of Industry  Funding of Industry sponsored activities (e.g. research)  Acting as spokesperson for Industry  Membership includes:  Corporate timber companies (e.g. Sappi and Mondi)  Commercial timber farmers (1 300)  Small emergent timber farmers (20 000)  Members own 85% of plantation area in South Africa

Importance of SA Forestry Industry?  Major investor in rural areas and catalyst for rural development  Employs people in plantation operations  Plantation area of 1.4 million hectares (1.2% of SA)  Produces16 m tons of timber p.a. worth R3bn  Contributes 9.9% of Agric./Forestry/Fisheries GDP  Supports downstream processing activities which:  employ people  have annual sales of R22bn  Export R11bn worth of products  Produce net forex earnings of R6bn The Forestry Industry is an important player in the South African economy

Where is the Industry Coming from? The Forestry Industry:  Fully accepts the right of and the principle that Municipalities fund their activities through the levying of property rates  Fully supports the objectives of the Property Rates Bill BUT Does have some serious concerns about the impact of some of the Bill’s provisions, due to its particular characteristics and circumstances

Characteristics of Forestry Industry  Has never been subject to the payment of rates before  Has never received any Municipal services in the past  Provides such services at its own expense  Has a large asset base but low returns  Large % of this asset base comprises the value of trees  Plantation crops can take up to 30 yrs to reach maturity  Plantations (and hence value) can be destroyed by pests, diseases, climatic conditions and fire  By law ha of land is not allowed to be planted up with trees  Subject to land claims

Main Concerns of Forestry Industry  Property valuations at discretion of valuers (market value or improved value)  Level of property rates charged and effect on:  International competitiveness  Financial viability of Industry  Status as “newly rateable property” may not be secure  Status of land subject to land claims  Status of land which, by law, the Industry cannot plant  Status of protected and conservation land  Valuations may not be based on “existing use”  Provision of Municipal Services

Market Value vs. Improved Value 1. Residential Property Improved Value = Market Value 2. Commercial / Industrial Property Improved Value = Market Value The “improved value” one and same as the “market value”

Market Value vs. Improved Value 3. Forestry Property Improved Value (land + buildings) Market Value (land + buildings + roads + trees) The “improved value” does NOT equal the “market value”

Main Problems of Using Market Value as a Base for Levying Property Rates  Standing timber included in market value. Thus:  Valuations change dramatically over time  Huge difference between market value and improved value  Timing of valuation important  Contrary to current tax legislation  When harvested, income from sale of trees taxed  Trees not valued for Capital Gains Tax purposes (i.e. not regarded as a capital asset but as “stock in trade”)  Value of standing timber separated from improved value in deeds registers (for transfer duty purposes)  Contrary to “Equality” Principle of Bill as not possible to treat all forestry / agricultural properties equitably

Forestry Valuation Changes Over Time FireHarvesting Timing crucial to what market value determined Value 2 Value 1

1. Dairy Farm 2. Stock Farm NO THEY WOULD NOT So why then are trees included in the market value of Forestry Estates? Market Value Contrary to “Equality” Principle of Bill Would the market value include : 3. Maize Farm Would the market value include :

Forestry Valuations vs. Other Valuations Removing trees from value allows for equitable treatment across all agricultural sectors

Forestry Valuations Differences Between Tree Crops Removing trees from value allows for equitable treatment across all timber growers 62.3% 56.0% 45.1%44.8%

Advantages of Using Improved Value as a Base for Levying Property Rates  Standing timber excluded from improved value. Thus:  Valuations change slowly over time  Timing of valuation unimportant  In line with current tax legislation  In line with “Equality” Principle of Bill as would be possible to treat all forestry / agricultural properties equitably as they could all be valued on the same basis (i.e. the playing fields would be levelled)

Precedent Set Agricultural properties have been valued in the Cape for many years using the market value as a base. HOWEVER In terms of Section 14 (2) (c) (iv) of the Cape Ordinance, “the items not to be taken into account shall be as follows: a)structural works, dipping tanks, storage tanks, walls, silo's and kraals if permanently constructed; b)irrigation works, dams, boreholes, wells, permanent fences, reclamation works, subsoil, drainage, plantations, vineyards and orchards; and c)any residential building erected for occupation by bona fide farm workers......”.

Definition of “Improvements” Recommendation Standing crops be specifically excluded from the definition of “improvements” by the insertion of another exemption Clause, namely: “(c) any cultivated plant or crop including vegetables, pastures, standing plantations, orchards, vineyards sugar cane, cereal crops, tobacco, flowers etc.” This will result in all valuers valuing such property consistently and in an equitable manner

Status as “Newly Rateable Property”  A number of Municipalities have already begun to levy Property Rates on rural properties:  In an inconsistent manner  Not in accordance with the provisions of the new Bill  We strongly believe that:  They have acted in contravention of the spirit of the Bill  In a manner which will penalise affected property owners i.r.o. the phasing in of rates on “newly rateable” property, as provided for in the Bill

Status as “Newly Rateable Property” Recommendation The definition of “newly rateable property” be amended to that appearing in earlier drafts of the Bill, namely: “…rateable property on which no property rates were levied before 30 June 2002” This will not only lead to equality of treatment but dovetails with the current definition of “existing rateable property”

Legislative Restrictions on Planting  In terms of the provisions of Government legislation i.r.o. the issuing of afforestation permits, only 70% of the permitted area can be planted up with trees  These areas:  Cover ha  Are managed for conservation of water and biodiversity  Cost Millions of Rand per year to manage and maintain  Extensive firebreaks are also maintained They are a liability rather than an asset

Recommendation A separate category of land be added in terms of Clause 15 (2) of the Bill which is exempt from the payment of property rates, namely: “land subject to legislative prohibition of use”. This will give guidance to valuers and ensure that such land which is, in effect, a liability is not rated Legislative Restrictions on Planting

Provision of Municipal Services  In the absence of Municipal services in the past the Forestry Industry has, at its own cost, provided such services.  Total cost of Infrastructure in today’s terms almost R400 million  Total annual cost in today’s terms of upgrading and maintaining services R103 million  Services / Infrastructure provided  Housing (89.3% of inv.)  Clinics  Schooling facilities (186)  Training facilities  Basic Services  Potable water (93.1% have access)  Decent sanitation (94.1% have access)  Electricity (69.4% have access) If no Municipal services provided, “double edged sword”

Recommendation In cases where Municipalities cannot provide rural services and to encourage landowners to continue to provide services themselves: Guidelines be included in the Bill to allow for the deduction of service delivery costs incurred by such landowners from their property rate liabilities. This will avoid “double taxation” and the possible non-provision of services Provision of Municipal Services

Recommendation As is currently the case in the Cape, where bona fide workers’ housing is excluded from the market value of agricultural property, such accommodation be specifically excluded from the definition of “improvements” by the insertion of another exemption Clause, namely: “(d) any residential building erected for occupation by bona fide agricultural or forestry workers”. This will not penalise those landowners who upgrade their workers’ accommodation or lead to the possible housing of workers off their land Provision of Housing

Summary  The objectives of the Bill are fully supported  Current ambiguities should be resolved so that all properties are valued according to the same criteria  Standing crops should be specifically excluded from the definition of “improvements”  All property that fell outside the old Municipal boundaries should be classified as “newly rateable” properties  Landowners should not be penalised for providing services or upgrading workers’ accommodation  Land that by law cannot be used should be exempt from rates

Conclusion We need a “Win Win” situation WHERE Municipalities can generate the necessary income to run effective and efficient services for ALL their ratepayers and communities BUT Making sure that all liable for rates are treated equitably and that neither the economic viability of forestry and agricultural enterprises, nor their international competitiveness is compromised