Submission to the Portfolio Submission to the Portfolio Committee for Provincial and Committee for Provincial and

Local Government onLocal Government onThe Property Rates BillThe Property Rates Bill

1515thth May 2003 May 2003

Focus of PresentationFocus of Presentation

Who is Forestry South Africa?Who is Forestry South Africa?

Importance of the Forestry IndustryImportance of the Forestry Industry

Where is the Industry coming from?Where is the Industry coming from?

Major ConcernsMajor Concerns

RecommendationsRecommendations

Who is Forestry South Africa?Who is Forestry South Africa? FSA is an Association representing the interests of all FSA is an Association representing the interests of all

timber growers in South Africa.timber growers in South Africa. Main roles:Main roles:

Promotion of IndustryPromotion of Industry Funding of Industry sponsored activities (e.g. research)Funding of Industry sponsored activities (e.g. research) Acting as spokesperson for IndustryActing as spokesperson for Industry

Membership includes:Membership includes: Corporate timber companies (e.g. Sappi and Mondi)Corporate timber companies (e.g. Sappi and Mondi) Commercial timber farmers (1 300)Commercial timber farmers (1 300) Small emergent timber farmers (20 000)Small emergent timber farmers (20 000)

Members own 85% of plantation area in South AfricaMembers own 85% of plantation area in South Africa

Importance of SA Forestry Industry?Importance of SA Forestry Industry? Major investor in rural areas and catalyst for rural Major investor in rural areas and catalyst for rural

developmentdevelopment Employs 60 000 people in plantation operationsEmploys 60 000 people in plantation operations Plantation area of 1.4 million hectares (1.2% of SA)Plantation area of 1.4 million hectares (1.2% of SA) Produces16 m tons of timber p.a. worth R3bnProduces16 m tons of timber p.a. worth R3bn Contributes 9.9% of Agric./Forestry/Fisheries GDP Contributes 9.9% of Agric./Forestry/Fisheries GDP Supports downstream processing Supports downstream processing activitiesactivities which: which:

employ 50 000 peopleemploy 50 000 people have annual sales of R22bnhave annual sales of R22bn Export R11bn worth of productsExport R11bn worth of products Produce net forex earnings of R6bnProduce net forex earnings of R6bn

The Forestry Industry is an important player in the The Forestry Industry is an important player in the South African economySouth African economy

Where is the Industry Coming from?Where is the Industry Coming from?The Forestry Industry:The Forestry Industry: Fully accepts the right of and the principle that Fully accepts the right of and the principle that

Municipalities fund their activities through the levying of Municipalities fund their activities through the levying of property rates property rates

Fully supports the objectives of the Property Rates BillFully supports the objectives of the Property Rates Bill

BUTBUT

Does have some serious concerns about the impact of Does have some serious concerns about the impact of some of the Bill’s provisions, due to its particular some of the Bill’s provisions, due to its particular

characteristics and circumstancescharacteristics and circumstances

Characteristics of Forestry IndustryCharacteristics of Forestry Industry Has never been subject to the payment of rates beforeHas never been subject to the payment of rates before Has never received any Municipal services in the pastHas never received any Municipal services in the past Provides such services at its own expenseProvides such services at its own expense Has a large asset base but low returnsHas a large asset base but low returns Large % of this asset base comprises the value of treesLarge % of this asset base comprises the value of trees Plantation crops can take up to 30 yrs to reach maturityPlantation crops can take up to 30 yrs to reach maturity Plantations (and hence value) can be destroyed by Plantations (and hence value) can be destroyed by

pests, diseases, climatic conditions and firepests, diseases, climatic conditions and fire By law 500 000 ha of land is not allowed to be planted By law 500 000 ha of land is not allowed to be planted

up with treesup with trees Subject to land claimsSubject to land claims

Main Concerns of Forestry IndustryMain Concerns of Forestry Industry Property valuations at discretion of valuers Property valuations at discretion of valuers (market (market

value or improved value)value or improved value) Level of property rates charged and effect on:Level of property rates charged and effect on:

International competitivenessInternational competitiveness Financial viability of IndustryFinancial viability of Industry

Status as “newly rateable property” may not be secureStatus as “newly rateable property” may not be secure Status of land subject to land claimsStatus of land subject to land claims Status of land which, by law, the Industry cannot plantStatus of land which, by law, the Industry cannot plant Status of protected and conservation landStatus of protected and conservation land Valuations may not be based on “existing use”Valuations may not be based on “existing use” Provision of Municipal ServicesProvision of Municipal Services

Market Value vs. Improved ValueMarket Value vs. Improved Value1. Residential Property1. Residential Property

Improved Value Improved Value

= Market Value= Market Value

2. Commercial / Industrial Property2. Commercial / Industrial Property

Improved Value Improved Value

= Market Value= Market Value

The “improved value” one and same as the “market value”The “improved value” one and same as the “market value”

Market Value vs. Improved ValueMarket Value vs. Improved Value3. Forestry Property3. Forestry Property

Improved ValueImproved Value

(land + buildings)(land + buildings)

Market ValueMarket Value

(land + buildings + roads + trees)(land + buildings + roads + trees)

The “improved value” does The “improved value” does NOTNOT equal the “market value” equal the “market value”

Main Problems of Using Market Value as a Main Problems of Using Market Value as a Base for Levying Property RatesBase for Levying Property Rates Standing timber included in market value.Standing timber included in market value. Thus:Thus:

Valuations change dramatically over timeValuations change dramatically over time Huge difference between market value and improved valueHuge difference between market value and improved value Timing of valuation importantTiming of valuation important

Contrary to current tax legislationContrary to current tax legislation When harvested, income from sale of trees taxedWhen harvested, income from sale of trees taxed Trees not valued for Capital Gains Tax purposes (Trees not valued for Capital Gains Tax purposes (i.e. not i.e. not

regarded as a capital asset but as “stock in trade”)regarded as a capital asset but as “stock in trade”) Value of standing timber separated from improved value in Value of standing timber separated from improved value in

deeds registers deeds registers (for transfer duty purposes)(for transfer duty purposes) Contrary to “Equality” Principle of Bill as not possible to Contrary to “Equality” Principle of Bill as not possible to

treat all forestry / agricultural properties equitablytreat all forestry / agricultural properties equitably

Forestry Valuation Changes Over TimeForestry Valuation Changes Over Time

Time

Value

Improved Value Market Value

Fire Harvesting Harvesting

Timing crucial to what market value determinedTiming crucial to what market value determined

Value 2

Value 1

1. Dairy Farm1. Dairy Farm

2. Stock Farm2. Stock Farm

NO THEY WOULD NOTNO THEY WOULD NOTSo why then are trees included in the market valueSo why then are trees included in the market value

of Forestry Estates?of Forestry Estates?

Market Value Contrary Market Value Contrary to “Equality” Principle of Billto “Equality” Principle of Bill

Would the market value include :Would the market value include :

Would the market value include :Would the market value include :

3. Maize Farm3. Maize FarmWould the market value include :Would the market value include :

Forestry Valuations vs. Other Forestry Valuations vs. Other ValuationsValuations

Time

Value

Forestry Imp.V Forestry MV Dairy Mkt. VStock Mkt. V Maize Mkt. V

Removing trees from value allows for equitable Removing trees from value allows for equitable treatment across all agricultural sectorstreatment across all agricultural sectors

Forestry ValuationsForestry ValuationsDifferences Between Tree CropsDifferences Between Tree Crops

R 0

R 2,000

R 4,000

R 6,000

R 8,000

R 10,000

R 12,000

R 14,000

Pine Gum Wattle Average

Crop

Valu

eLand Fixed Improvements Trees

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 Advantages of Using Improved Value as a Base for Levying Property Ratesa Base for Levying Property Rates Standing timber excluded from improved value.Standing timber excluded from improved value. Thus:Thus:

Valuations change slowly over timeValuations change slowly over time Timing of valuation unimportantTiming of valuation unimportant

In line with current tax legislationIn line with current tax legislation

In line with “Equality” Principle of BillIn line with “Equality” Principle of Bill as would be as would be possible to treat all forestry / agricultural properties possible to treat all forestry / agricultural properties equitably as they could all be valued on the same basis equitably as they could all be valued on the same basis (i.e. the playing fields would be levelled)(i.e. the playing fields would be levelled)

Precedent SetPrecedent SetAgricultural properties have been valued in the Cape for Agricultural properties have been valued in the Cape for many years using the market value as a base.many years using the market value as a base.

HOWEVERHOWEVERIn terms of In terms of Section 14 (2) (c) (iv) of the Cape Ordinance, Section 14 (2) (c) (iv) of the Cape Ordinance, ““the items not to be taken into account shall be as the items not to be taken into account shall be as follows:follows:

  a)a) structural works, dipping tanks, storage tanks, walls, silo's structural works, dipping tanks, storage tanks, walls, silo's

and kraals if permanently constructed;and kraals if permanently constructed;b)b) irrigation works, dams, boreholes, wells, permanent irrigation works, dams, boreholes, wells, permanent

fences, reclamation works, subsoil, drainage, fences, reclamation works, subsoil, drainage, plantationsplantations, vineyards and orchards; and, vineyards and orchards; and

c)c) any residential building erected for occupation by bona any residential building erected for occupation by bona fide farm workers......”.fide farm workers......”.

Definition of “Improvements”Definition of “Improvements”

RecommendationRecommendationStanding crops be specifically excluded from the Standing crops be specifically excluded from the definition of “improvements” by the insertion of definition of “improvements” by the insertion of another exemption Clause, namely:another exemption Clause, namely:

““(c) (c) any cultivated plant or crop including any cultivated plant or crop including vegetables, pastures, standing plantations, vegetables, pastures, standing plantations, orchards, vineyards sugar cane, cereal crops, orchards, vineyards sugar cane, cereal crops, tobacco, flowers etc.”tobacco, flowers etc.” This will result in all valuers valuing such property This will result in all valuers valuing such property

consistently and in an equitable mannerconsistently and in an equitable manner

Status as “Newly Rateable Status as “Newly Rateable Property”Property” A number of Municipalities have already begun to A number of Municipalities have already begun to

levy Property Rates on rural properties:levy Property Rates on rural properties: In an inconsistent mannerIn an inconsistent manner Not in accordance with the provisions of the new BillNot in accordance with the provisions of the new Bill

We strongly believe that:We strongly believe that: They have acted in contravention of the spirit of the BillThey have acted in contravention of the spirit of the Bill In a manner which will penalise affected property In a manner which will penalise affected property

owners i.r.o. the owners i.r.o. the phasing in of ratesphasing in of rates on “newly on “newly rateable” property, as provided for in the Billrateable” property, as provided for in the Bill

Status as “Newly Rateable Status as “Newly Rateable Property”Property”

RecommendationRecommendation

The definition of “newly rateable property” be The definition of “newly rateable property” be amended to that appearing in earlier drafts of the amended to that appearing in earlier drafts of the Bill, namely:Bill, namely:

“…“…rateable property on which no property rates rateable property on which no property rates were levied before 30 June were levied before 30 June 20022002” ”

This will not only lead to equality of treatment but This will not only lead to equality of treatment but dovetails with the current definition of “existing rateable dovetails with the current definition of “existing rateable

property”property”

Legislative Restrictions on PlantingLegislative Restrictions on Planting In terms of the provisions of Government legislation In terms of the provisions of Government legislation

i.r.o. the issuing of afforestation permits, only i.r.o. the issuing of afforestation permits, only 70%70% of the permitted area can be planted up with treesof the permitted area can be planted up with trees

These areas:These areas: Cover Cover 500 000 ha500 000 ha Are Are managed for conservationmanaged for conservation

of water and biodiversityof water and biodiversity Cost MillionsCost Millions of Rand per of Rand per

year to manage and maintainyear to manage and maintain Extensive firebreaks are also maintainedExtensive firebreaks are also maintained

They are a liability rather than an assetThey are a liability rather than an asset

RecommendationRecommendation

A separate category of land be added in terms of A separate category of land be added in terms of Clause 15 (2) of the Bill which is exempt from Clause 15 (2) of the Bill which is exempt from the payment of property rates, namely:the payment of property rates, namely:

““land subject to legislative prohibition of use”.land subject to legislative prohibition of use”.

This will give guidance to valuers and ensure that such This will give guidance to valuers and ensure that such land which is, in effect, a liability is not ratedland which is, in effect, a liability is not rated

Legislative Restrictions on PlantingLegislative Restrictions on Planting

Provision of Municipal ServicesProvision of Municipal Services In the absence of Municipal services in the past the Forestry Industry has, In the absence of Municipal services in the past the Forestry Industry has,

at its own cost, provided such services.at its own cost, provided such services. Total cost of Infrastructure in today’s terms almost Total cost of Infrastructure in today’s terms almost R400R400 millionmillion Total annual cost in today’s terms of upgrading and maintaining services Total annual cost in today’s terms of upgrading and maintaining services R103R103 million million

Services / Infrastructure providedServices / Infrastructure provided Housing Housing (89.3% of inv.)(89.3% of inv.) ClinicsClinics Schooling facilities Schooling facilities (186)(186) Training facilitiesTraining facilities

Basic ServicesBasic Services Potable water Potable water (93.1% have access)(93.1% have access) Decent sanitation Decent sanitation (94.1% have access)(94.1% have access) Electricity Electricity (69.4% have access)(69.4% have access)

If no Municipal services provided, “double edged If no Municipal services provided, “double edged sword”sword”

RecommendationRecommendationIn cases where Municipalities cannot provide In cases where Municipalities cannot provide rural services and to encourage landowners to rural services and to encourage landowners to continue to provide services themselves:continue to provide services themselves:

Guidelines be included in the Bill to allow for the Guidelines be included in the Bill to allow for the deduction of service delivery costs incurred by deduction of service delivery costs incurred by such landowners from their property rate such landowners from their property rate liabilities.liabilities.

This will avoid “double taxation” and the This will avoid “double taxation” and the possible non-provision of servicespossible non-provision of services

Provision of Municipal ServicesProvision of Municipal Services

RecommendationRecommendationAs is currently the case in the Cape, where As is currently the case in the Cape, where bona fidebona fide workers’ housing is excluded from the market value of workers’ housing is excluded from the market value of agricultural property, such accommodation be specifically agricultural property, such accommodation be specifically excluded from the definition of “improvements” by the excluded from the definition of “improvements” by the insertion of another exemption Clause, namely:insertion of another exemption Clause, namely:

““(d) any residential building erected for occupation by (d) any residential building erected for occupation by bona bona fidefide agricultural or forestry workers”. agricultural or forestry workers”.

This will not This will not penalisepenalise those landowners who those landowners who upgrade their workers’ accommodation or lead to upgrade their workers’ accommodation or lead to

the possible housing of workers off their landthe possible housing of workers off their land

Provision of HousingProvision of Housing

SummarySummary The objectives of the Bill are fully supportedThe objectives of the Bill are fully supported Current ambiguities should be resolved so that all Current ambiguities should be resolved so that all

properties are valued according to the same criteriaproperties are valued according to the same criteria Standing crops should be specifically excluded from the Standing crops should be specifically excluded from the

definition of “improvements”definition of “improvements” All property that fell outside the All property that fell outside the oldold Municipal boundaries Municipal boundaries

should be classified as “newly rateable” propertiesshould be classified as “newly rateable” properties Landowners should not be penalised for providing services Landowners should not be penalised for providing services

or upgrading workers’ accommodationor upgrading workers’ accommodation Land that by law cannot be used should be exempt from Land that by law cannot be used should be exempt from

rates rates

ConclusionConclusionWe need a We need a “Win Win”“Win Win” situation situation

WHEREWHEREMunicipalities can generate the Municipalities can generate the necessary incomenecessary income to to

run run effectiveeffective and and efficient servicesefficient services for for ALLALL their their ratepayers and communitiesratepayers and communities

BUTBUTMaking sure that all liable for rates are treated Making sure that all liable for rates are treated

equitablyequitably and that neither the and that neither the economic viabilityeconomic viability of of forestry and agricultural enterprises, nor their forestry and agricultural enterprises, nor their international competitivenessinternational competitiveness is is compromisedcompromised